Here’s a question for you: If you put $5,000 dollars into your 401k plan this year and your employer also puts $5,000 into your 401k plan and over the course of a year your investments lose 40% of their value… assuming all of this, how much would you have lost?
The answer may surprise you. You’ve actually not lost anything – you’re at a gain on your 401k plan at this point. Remember that 401k plans are usually matched by your employer, and quite often dollar for dollar up to a certain percentage. Assuming that the $5,000 you contributed was the maximum that your employer would match you immediately net a 100% return on your money. After all, you put in $5,000 and so did they. Now if that entire amount ($10,000 at this point) lost 40% of its value you’re down to a 401k plan value of $6,000 dollars. All from an initial investment (out of your paycheck) of $5,000.
Guess what that means? Your 401k plan portfolio has still gained 20%. That’s a fantastic return on your money by any standard. Things might be dramatic out there in the world of money, but you have to remember that you are in it for the long run, and with the exception of those who plan on retiring sometime in the next 5 years you ought to maintain your 401k plan investments.
Don’t let the news frighten you, don’t check your investments daily and most of all don’t go looking for bad news without thinking about what good can (and ultimately will) come from the difficulties we are now facing. But most of all don’t sell out of your 401k plan and PLEASE OH PLEASE continue to invest in it. You’re practically guaranteed a positive return, even with negative stock returns in the 30-40% range. After all your employer is likely giving you FREE money, just for taking advantage of their 401k retirement plan.
6 responses to “Keep Investing In Your 401k Plan”
Hello:
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Nice post Joe. This message really needs to be drilled into the heads of many, many people out there. The long-term effects of all these people yanking money out of their 401k’s and IRAs is not going to be good. I understand some people are dipping into these funds to help save their house or something like that, but many are just pulling out because of fear.
It’s no secret that the people who came out of the Great Depression the wealthiest were the ones who kept saving and investing while everybody else was panicking. It’s going to be no different this time.
For young guns such as ourselves, we’ll look back at these days and crave for buying opportunities like we’re seeing now.
Blakes last blog post..Passive Income for September 2008:
Is the advise the same if you are investing in your works 457 plan? There is no match so all the money going in is mine….
Kristoffer,
Without the matching it’s not nearly as “immune” to losses in a time such as this. The true answer to your question is that I’m unsure what is best for you, because I know not of your circumstances. Generally speaking if you are more than 5-10 years away from retirement I’d actually recommend increasing your contributions. Now is as good a time as any to buy – everything’s going at a discount.
Keep in mind I’m not a licensed financial advisor. That’s just my opinion.
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Great article! Thanks for the tips!