By Quentin Fottrell
With many investors receiving their paychecks today and tomorrow, it’s a good time to ask: Do I have enough savings to handle another economic downturn? And if not, should I cut my 401(k) contribution rate to help shore up my emergency fund?
Of course, how you answer these questions depends largely on where your think this roller-coaster market is heading — the Dow was up more than 200 points this morning, after falling more than 500 points yesterday. But before you rush to make any changes, financial advisers recommend revisiting your monthly budget (or creating you if you haven’t already) to see if there are other ways to cut costs and increase your savings without reducing your contribution rates. If you do decide to make a change, ask your employer how to access your 401(k) account online and how many free adjustment you can make a year (the vary from employer to employer). After making the adjustment, check the correct amount has been deducted from your next paycheck.
Cut your contribution: If you have neglected your savings, then definitely cut back on your 401(k) contribution, says Jeff Seymour, managing director at Triangle Wealth Management in Cary, N.C. “Classical financial planning calls for 6 months of living expense to be stashed in a taxable account in case hell freezes over and you lose a job, but 9 months is my rule of thumb.” He believes the country is heading toward a double-dip recession. “This is one of those times in your life that you need to make a very strong defense,” Seymour says.
Increase your contribution: If you are over five years from retirement and you don’t mind taking risks, increase your contribution to take advantage of cheaper stock prices, says Pete D’Arruda, president of Capital Advisory Financial Group, also based in Cary, N.C. At the very least, he says you should put in enough so your employer matches your contribution dollar-for-dollar. “That’s free money,” he says. “Whatever you do don’t cut your contribution. This could be a long-term gift to get a lot more shares for a lot less money.”