Should I halt my 401(k) contributions? What if I switched everything to cash? These are important inquiries, and the answers vary based on your situation.

Is stopping my 401(k) contributions necessary due to the pandemic? You might not love the responses you’ve received, and you're not alone in feeling that way.

We've heard the reasons to keep contributing to our 401(k), 403(b), or similar retirement accounts during these times. If you stop, it could mean…

  1. Missing out on employer matches (essentially free money)
  2. Paying more taxes since you lose the upfront tax advantages from a traditional 401(k) or the tax-free benefits from a Roth 401(k)
  3. Having less cash per paycheck after taxes
  4. Missing critical recovery days that could damage long-term investment returns

While this is accurate, it might not apply to everyone. Let’s reassess.

Q: Is it advisable to stop putting money into my 401(k)? (Attempt 2)

That depends on your reasoning.

If you're considering halting contributions due to market anxiety, Certified Financial Planner Jeanne Fisher suggests changing your perspective. "Think of yourself as a shopper... If I asked when you want to buy electronics, you'd likely say Black Friday," explains Fisher, managing director at Strategic Retirement Partners in Nashville.

Currently, we’re in a Black Friday scenario for stocks. If your financial situation is stable (like being employed, having an emergency fund, and covering essential expenses), keep adding to your 401(k) regularly. You might find comfort in knowing that many investors are doing just that, according to recent data from Vanguard.

If your concern isn’t about market volatility…

Q: When is it acceptable to stop contributing to my 401(k)?

If the pandemic has caused financial distress, and you can't afford to save for retirement, it’s okay to pause. "I’d rather you reduce contributions than incur debt or fall behind on bills if your cash flow is extremely tight," Fisher advises.

Immediate financial needs should take priority over retirement savings if, for instance, the main earners in your home are laid off or unable to work, and you lack an adequate emergency fund. The same applies if you fear job loss or significant salary cuts.

Remember that if you leave a job, you can’t contribute to that company’s 401(k) anymore. If you’re in a position to save, consider opening an individual retirement account (IRA). (See: 6 Types of IRAs You Should Know About.)

Q: My employer has stopped matching 401(k) contributions. Should I keep contributing?

Yes, you should continue. Experts point out that you'll still gain tax benefits by contributing to your retirement account. Furthermore, during the last economic downturn, many companies that paused 401(k) matches reinstated them quickly. According to Fidelity Investments, half of the companies that reduced their match in 2008/2009 brought it back within a year. Being present and contributing is key when your employer restores the match.

Q: What if I moved my investments to cash when the market dropped?

Leaving stocks entirely might indicate that your portfolio doesn’t align with your true risk tolerance. Greg McBride, chief financial analyst at Bankrate.com, suggests reassessing your long-term goals and risk profile to determine the best investment strategy. However, don’t let short-term market shifts cloud your judgment and jeopardize your long-term financial stability. You need to sleep well at night, but don’t go so conservative that inflation erodes your savings.

Q: My asset allocation feels off in my 401(k). Should I adjust now or wait?

There's no way to predict when market volatility will lessen. "Why delay? If the market remains unpredictable, you can always rebalance later. There's no point in risking your asset allocation straying too far from your target," McBride states.

However, avoid drastically changing your asset allocation strategy. If you were 60% stocks and 40% bonds before the crisis, don’t flip that mix based on your current emotions. Long-term strategies should be crafted during stable times, not periods of panic.

Q: What’s the recommended stock versus bond allocation for my portfolio?

A common guideline is subtracting your age from 110 to determine the percentage of your portfolio that should be in stocks. The remaining amount would go into bonds. This approach works for most individuals, though not all.

“Not everyone at the same age has the same risk tolerance,” Fisher explains. Consider the rule as adjustable. For instance, a typical 30-year-old might allocate 80% to stocks and 20% to bonds. Yet, a risk-averse 30-year-old might prefer a 70% stocks, 30% bonds split, while someone comfortable with more risk might consider a 90% stocks, 10% bonds allocation.

Q: Managing my 401(k) feels overwhelming. What should I do?

Target-date mutual funds are ideal for situations like this. They offer a straightforward solution for those uncomfortable managing their investment mix independently. (And there’s no shame in that!)

These funds adjust investments according to how close the investor is to retirement. As the retirement date approaches, the fund becomes more conservative. The companies managing these funds continuously adjust holdings based on market changes, selling excess investments and increasing underweighted ones automatically.

Most 401(k) plans provide target-date mutual funds or managed account options. (Look for funds with a year in the name.) You can transition your funds into one at any time. For example, a 40-year-old planning to retire in 28 years might choose a target-date 2048 fund, or as close to that year as possible. If you're willing to take more risks, opt for a fund with a later target date.

Q: How can I capitalize on the market dip during the COVID-19 pandemic?

You already are! The structure of 401(k)s allows you to dollar-cost average into your account through regular contributions. This strategy is recommended by many professionals because it prevents you from trying to time the market perfectly. Your contributions will naturally spread out your investments: some will purchase when the market dips, while others will buy during upswing periods, averaging your costs.

The best way to seize the moment right now is to maximize your contributions if you're not already doing so. The IRS permits employees to contribute up to $19,500 to a 401(k) or similar retirement plan for 2020. If you're 50 or older, you can contribute up to $26,000 annually. If your company automatically enrolled you in the plan, ensure you adjust your contributions (consult HR) since you may only be contributing a fraction of the allowed amount and might not be maximizing your employer match.

Further Insights on Your Retirement Account: