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Cut down on 401(K) contributions
Question: My husband and I are currently putting 9% of our income into our Roth 401K with a 4% match from his employer. We got a late start in contributing to that due to a late change of career which entailed years of schooling, so we currently only have about $40,000 in our 401K.
However, we have almost no savings outside of that. We have $5000 in the bank, some of which we need to use over the summer. I am wondering if we should decrease our 401K contribution and sock that money into savings instead until we have a few months' worth of cushion. Kathleen, Rexburg, ID
Answer: I think your financial instincts are right. It's important to have a decent cash cushion in normal times, let alone during the extraordinary period we're living through today. You'll still be saving money, just not as much in the retirement account (where you would pay a steep penalty if you tapped into that money.)
There are three keys to this strategy: First, continue to take full advantage of your employers match. The real investment kick in a retirement savings plan comes from the match. Second, shift the money into a very safe place backed by a government guarantee, such as an FDIC insured savings account. Third, remember to increase the sums going into the retirement plan when you've built up a large enough cash cushion.
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.
Instead of putting money to savings, put it into a money market account in a Roth IRA. You'll earn some interest for retirement, while keeping the principal safe.
If you ever need the money, you can withdraw the contributions (not earnings) at any time, without penalty. And if you don't need the money, then you've saved money toward retirement, and you can shift the money into a more appropriate bond or stock fund when convenient.
The taxable savings rates are paltry, so you won't "lose" out on withdrawing the earnings. (1% of the 2009 $5000 maximum Roth IRA contribution is only $50.)
The importasnt part is that you don't lose the opportunity to contribute to retirement, but you kep your cushion.
(Chris, does this apply for Roth 401ks as well? If so, then keep it simple ane just keep contributing to the Roth 401k--but be sure to keep this cushion money in an appropriate money market account.)
