Why Pausing Your 401(k) During Global Uncertainty Can Cost You Thousands
When markets swing wildly and headlines grow more alarming by the day, it can feel natural to pull back on long-term investing and focus on immediate cash flow.
For many workers, pausing 401(k) contributions during uncertain times feels like a practical way to create breathing room. But financial experts say what seems like a short-term fix can potentially turn into one of the costliest retirement mistakes people make.
Experts make the cause for why you shouldn't pause your contributions — find out more below.
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Why Pausing Your 401(k) Hurts More Than Most People Realize
A pause in retirement contributions does more than temporarily increase take-home pay.
"When someone pauses their 401(k), they are halting the process of dollar-cost averaging, potential employer match — free money — reducing the compounding effect on their money and lastly, creating a potentially worse tax situation,” explained Sterling Neblett, CEO of Centurion Wealth Management.
And at the end of the day, pausing your contribution actually doesn’t lift your income as much as you think, according to Ashley Akin, certified public accountant (CPA) and senior contributor at Prop Firm App.
“If you stop saving $500 a month in your 401(k), your paycheck will not go up by $500. It may only go up by about $350, because taxes get taken out right away.”
How 1 Year of Missed Contributions Can Snowball Into 6 Figures
The real financial damage from pausing contributions often comes years later, due to lost compounding growth.
Neblett offered an example of someone who is 35 and regularly contributes $10,000 per year pretax. Their company matches 25% of that contribution and they are in the 30% tax bracket, with an 8% rate of return.
“Missing that one year of contribution would cost you $3,000 in additional taxes, miss $2,500 company match, plus the annual compounding growth on that money which at age 65 would have been worth $125,783,” Neblett said.
That’s a significant chunk of change to miss out on over a little uncertainty.
Why Market Downturns Can Be the Best Time To Keep Investing
While uncertainty makes many investors want to retreat, “Market downturns are where the opportunity is,” Neblett said. “We typically recommend increasing contributions when the market has a downturn because you are buying low and increasing your odds of outperformance when the market rebounds.”
Akin made the comparison that the market going down is “just like when your favorite toy goes on sale and suddenly you can afford more with the same amount of money.”
When It Does Make Sense To Pause Contributions
There are situations where temporarily reducing or pausing retirement contributions may be necessary.
“If you need the cash flow to live for important expenses. You don't want to go broke or bankrupt yourself because you are overfunding retirement,” Neblett said, as an example.
Akin agreed, adding that problems like owing “a lot of money on a credit card,” facing potential loss of a home or owing money to the government “are real problems that need to be fixed first.”
Still, experts cautioned against letting fear alone drive retirement decisions.
“Life has always been a little scary and that alone is not a good reason to stop,” Akin added.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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