Financial Planning for Generation X & Y Women
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Expert Q&A Archive

Should I continue investment in a 401(k) while laid off?
My question is related to the 401(k). I am 39, and I was recently laid off about two months ago. In reviewing my 401(k), I've lost about $30,000 this year. Right now I'm on continuation plan severance through next July, and I was wondering if I should continue to invest in the company's 401(k). What should I do at this point?
Michael A. Masiello:
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That’s quite a benefit. Yes, if you can, you should continue contribution into a diversified 401k; then you can roll it over into an IRA when you are officially done or get a new job. You are young enough that the current market volatility will be to your advantage, i.e. buying great stocks cheap and holding them for a long time. This is where guidance, advice, and a plan or strategy can help you get more comfortable with investing in a down market. Long-term this will be a huge plus for you. Good luck, Mike.
Bettye J. Banks:
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I have a real problem in throwing good money after bad.

I would certainly transfer the funds in the 401(k) you had with your former employer into a self- directed IRA as soon as you possibly can.

If you discontinue putting funds into that 401(k), you should probably re-direct that same amount into a Roth IRA. Since this would mean after-tax contributions, it also means you might not have to pay taxes on the earnings when you begin to access the funds later on.

You need an experienced, competent financial advisor to help you through the process. Ask your friends and associates for a referral.

Always ask your investment professional who they work for--you or the company they represent? If the advisor does not work first in your best interest, keep looking.
Rosemary Ervin, CPA:
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What is the alternate use of your funds? Do you need the cash? At 39 if you need to withdraw from the plan in the near future, you will pay a penalty. It is always good to stay focused on retirement and continue to contribute, but with the current economy, do you think you will be
employed by next July? What will you be using for income next year?
Don't touch that 401(k) until you are in your late 50's. So the answer is “it depends.” Forget about the market tanking. Your retirement is long-range, and with a 20-year horizon, the funds will return. The real issue is what you will be using for income next year. You may want to
discontinue contributing and reserve the monthly contribution to a cash account that you can access in an emergency.

Don't wait for your severance to expire to find employment. It may get more competitive as the months go on. Good luck.
Gary Silverman, CFP®:
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This is a very difficult question to answer without a lot of additional information, but basically there are two thoughts. First, when in a transition (such as losing your job), cash is king. So I'd want you to put the money in a savings account or money market fund rather than in the 401k. That way you can access it easily without any negative tax ramifications.

A conflicting thought is that if your company will still match your contributions, then not putting money into the plan will cost you that free match. If that's the case, then even if you had to get at the money, the match overshadows the tax implications. Complicating the decision is your prospects for a new job, current investments, risk tolerance, tax bracket, etc. So I might suggest talking with a financial planner that will meet with you on an hourly basis. --Gary
Lynn Anne Gillen, CIMA® :
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I would start to build up a cash reserve. Without a solid job lined up, it is even more important to have extra cash on hand. Instead of contributing to your old 401k, redirect the money into a money market account.

Eventually, you will want to roll your 401k into an IRA to have a broader array of investment and beneficiary options. In the meantime, keep your 401k diversified among the investment choices available. This drastic market downturn will end, and, at your age, you have plenty of
time for it to recover and go on to make more money for you. Good luck.
Wendy Weiss, Ph.D.:
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You raise an important set of issues. A good financial advisor would not feel comfortable making a specific recommendation for you without knowing more about you. Questions to be asked would circle around the general question of “Do you need this money, or will you need these contributions within the next 10-20 years?” So we would ask such things as

• Are you married, or do you have another income in your home?
• Do you have children that may need help over the next 10-20 years?
• Do you have a family member who might need your help during the next 20 years?

The reason we would ask this is because a 401(k) is a special type of account, with benefits and restrictions.

A 401(K) is a great vehicle for saving and investing for retirement. You reduce your taxable income when you make a contribution. And your money can grow without being taxed (or [it’s] tax-deferred) while it remains in a retirement account. (You will probably have to pay taxes on the money when you take it out of the retirement account, though).

You cannot take that money out of the 401(k) until you are 59 1/2 years old. If you do, you risk paying taxes and a 10% penalty. That is good and bad. It creates an account dedicated to retirement savings. And this type of account is invested for the long term. The bad--if you are out of work for a long period of time, or need the money, you have to pay the penalty and taxes, mentioned above.

After all of that is said, I have some things for you to consider:
1. If you believe that you will not need the contributions for the 20 years until you are 59 1/2, then do contribute to your 401(K).
2. Can you handle the market volatility? Investing in this type of account is a long-term investment. The market goes up and it goes down over the long term. So you have to expect that there will be fluctuation in the value of your account. Over the long term, many analysts say that you can average 7% annually. But that is over the long term. It means that there are years when the market is down a LOT (like 2008) and years when it is up a great deal. You have to be willing to tolerate that movement. If not, then don't put new money into the market, unless....
• You realize that when the market goes down, your dollars buy more shares. So when the market goes up, your shares are likely to go up 2.
• Now the stock market may NOT go up for 1-2 years. If you can handle that, then you might be able to invest new money in it.

3. Is your 401(k) dropping in part because you have not diversified your account? Have you had a chance to develop a good asset allocation in that 401K yet? Investments should be diversified (or have a good allocation for your assets) so that you can reduce your exposure to the volatility of the market (or its ups and downs). If you do this, you would hold a percentage of safer investments, as well as those with higher risk (and return). Most people select mutual funds from the list available in the 401(K) in a manner that does not support diversification. Most folks just pick the mutual funds that did the best last year. That usually means they pick stock funds. And that usually means the stock funds are more volatile. So folks do not pick Treasury Bond funds, for instance. These usually reduce the wild changes in the value of your portfolio.

Chances are your 401(k) does have stable (also called stodgy, conservative, etc) investments among the list of possible investments to select. Those perform great in times like these (although they often offer something like 3% or 2% return). The ones that fit this description tend to be mutual funds with Treasury securities in them. Or the mutual funds hold safe (or relatively safe) bonds.

4. So if you want to contribute more money to your 401(K), and if you decide you can do so without needing the money for 20 years, make sure you contribute these new funds to a more conservative, stable mutual fund that is available in your 401(K). Then, in a few months...
5. Talk to a professional and make some careful decisions about your asset allocation. Make sure you are properly diversified. Then sell and buy only what would be appropriate to do so. (You don’t want to sell it all now and so lock in the losses you recently incurred.)

Interview a few professionals (at least 2, if not 3) and decide if you trust them, they are knowledgeable, etc. Then decide if you want to roll over your 401(k) into an IRA. You will have more investment choices if you roll it over. And you can take some time to see how this retirement account fits into your overall investment and financial plan.
I hope that you can weigh all of these factors and make a careful decision that is right for you, your family and your future.
Frank Wells:
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Thanks for your message and question. If the company will continue to match your contributions, then you would be wise to take advantage of their matching dollars, as this is "free money" to you. If they will not match, then you may want to use the extra funds for building a savings account, as you may need the money in your transition time to find a new
Rebecca Schreiber CFP®:
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First, I wish you luck during your job transition. I'm glad to hear that you have a generous severance package and that there is no immediate need to replace your income.

As for the 401(k) continuation, yes, continue to contribute to your 401(k). You may even be in a position to contribute more now that you are not incurring commuting and other employment-related costs. Until you confirm that your new employer's retirement plan is just as robust as the current 401(k), continue with the plan you have. Your next employer may require you to wait to contribute, in which case you can contribute to a traditional IRA or Roth IRA during the gap. Good luck, and best wishes!
Kim Nourie, CFP, CPA:
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I believe your best course of action right now depends on what your current emergency reserves are. At age 39, retirement is likely 20+ years away, and your retirement investments are for the long term. Hence, dollar cost averaging into retirement accounts while the market is substantially lower than it has been for many years may be a great way to take advantage of lower prices; however, if you do not have a new job lined up and do not have savings set aside to carry you through a period of unemployment, you may be better served putting funds into some short-term CDs and money market [accounts]. A general rule of thumb is 3-6 months of living expenses set aside in savings.

However, you need to assess the employment horizon of whatever field you are in. If you think it may take one year to get a job, target 12-18 months in emergency savings. Good luck!

Editor’s Note: For a definition of Dollar Cost Averaging, see the definition under the glossary on the Wi$eUp Website at
Rachel Lane, CFP:
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I would look at your situation independent of the market swings at the moment. Do you have enough cash reserves, or do you need to build them up further? If that's the case, you might consider adding to your emergency fund monthly instead of putting money into your 401k.

If, on the other hand, you are okay in terms of cash reserves, then continue funding your 401k or other retirement plan. An automatic monthly investment plan allows you to take advantage of the volatility perhaps more than any other strategy, given market conditions right now. The key is you must have a long time horizon. Be looking out 5 years down the road. In other words, don't be putting money you may need in less than 5 years into the stock market. I advise my clients that this holds true regardless of current market conditions.

Hope that helps!
Connie K. Marmet:
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First check to be sure your company's plan permits contributions while on continuation. Second, if you can afford to contribute, you will be glad you did when you are ready to retire. If you need the funds to meet basic needs, that's another matter. A good budget is a big help in times like these.
Delores Lenzy - Jones, CPA, CIA:
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This a great question. Ultimately, the answer rests with you. How much can you afford to continue to put into your 401K plan and still maintain your foundation needs (food, clothing, shelter)? If your answer is that you cannot afford both, then you can discontinue contributing to your 401K temporarily until you are more financially stable. Remember that [tax-]deferred programs like 401Ks are available at most companies, so there will be other opportunities to contribute.
Christina Gears:
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Yes, now is the time to invest. You'll be buying twice as many shares, and when the market recovers you'll have a better opportunity to profit. Thank you for asking.