Ask Money

Cut down on 401(K) contributions

Chris Farrell May 4, 2009

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.

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