Following the stock market this year has been dizzying. From tariff wars between U.S. and the rest of the world and actual warfare in the Middle East, things have been volatile, and some Americans may be considering pumping the breaks on saving money.
However, experts advise people to keep steadily saving even during difficult financial times.
In a piece from Amy Arnott, a portfolio strategist at Morningstar, provided to the Associated Press, she encouraged people to keep saving.
“Amid this year’s market turmoil, I’ve heard investors wonder if they should hit pause on 401(k) contributions until things settle down,” she said. “Though this approach sounds tempting, it’s better to stick with your investment strategy instead of waiting for conditions to improve.”
Arnott tested the “wait and see” approach to savings, referring to the method of pausing savings during rough financial periods and market downturns. She analyzed four different market downturns over the past 25 years.
“For this analysis, I assumed that an investor started contributions of $500 per month in January 2000, paused during each of the four above downturns, and then resumed contributions after the market had bottomed out,” Arnott explained.
She found that “consistent contributions won out,” and that “the consistent 401(k) contributor ended up nearly $200,000 ahead of the stop-and-start investor.” According to Arnott, the reason why that strategy worked is that “consistent contributions meant there were more dollars around to benefit when the market rebounded, while hitting pause on contributions meant the opposite.”
Arnott isn’t the only expert advising people to stick with 401(k) programs if they can. In a quarter one report released this year, Fidelity said that, though many individuals might be tempted to make changes to their retirement savings plan, changes such as decreasing contribution rates could have a negative impact on their finances moving forward.
As Arnott mentioned, 401(k) plans are seen as one of the best ways to save, even during tough times.
“What is probably the best single way to reach some lofty financial goal, meaning $1 million or higher – maybe somebody’s got ideas of going higher than that,” is the 401(k) plan, Mark Rosa, president and CEO of Jefferson Financial Federal Credit Union, told Audacy last month.
Per Nerdwallet, these plans are employer-sponsored retirement accounts that allow employees to contribute a portion of their paycheck to save for retirement. Often, employers even match employee contributions, and that’s where the savings magic comes in, according to Rosa.
“It’s like you’re making money with three hands,” he said. “What does that mean? Well, okay. I’m taking something out of my payroll and putting it into an investment vehicle at work. So that that’s done, I’m… I’m getting the tax break on the money that the government has provided. You’re shielding that money from taxes. So, it’s a pre-tax amount that's going to a typical 401(k). Then, your company is going to kick in free money.”
According to Fiedlity, the total 401(k) savings rate increased slightly to a record 14.3% in the first quarter despite market swings.
“Keeping money on the sidelines means betting against the odds,” said Arnott. “Statistically speaking, the market goes up more than it goes down. Watching a 401(k) lose money isn’t fun to live through, but things eventually turn around.”
There are some drawbacks to 401(k) plans, Nerdwallet said. These include penalties for taking money out early, annual contribution limits and a limited selection of investments. CNN noted this week that many 401(k) accounts do not offer access to private equity investments, though that could soon change.
Additionally, some Americans do not have access to these savings plans, around 56% of working Americans, Rosa told WWL’s Tommy Tucker. In that case, they can still save through an Individual Retirement Account, or IRA.
“You can establish an IRA for yourself that… should have two out of the three hands” he said, adding that “the money that you’re putting in can be tax-deferred and then that’s the second hand that you’ve saving money on the on the taxation while that money is growing.”