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To Save or Not To Save?

That's the question many workers ask when their employer stops matching 401(k) contributions.

I am participating in a 401(k) through my employer, but the employer has suspended the match.  Should I continue making contributions or save for retirement elsewhere? – Michael, Utah

You should absolutely continue making contributions to your 401(k) plan.  While an employer match is nice, it is simply icing on the cake. An unmatched 401(k) or other workplace retirement-savings plan still offers two tremendous advantages:

1. Immediate tax savings

2. The opportunity to enjoy tax-free buildup of your investments in the plan until you begin making withdrawals after you retire

Here’s an example of the immediate tax savings: Say you have been contributing $10,000 annually to your plan and you’re in the 25 percent federal income-tax bracket. Those contributions will reduce your tax bill by $2,500 ($10,000 multiplied by 25 percent in taxes). Or think of it this way: If you were to forego making the $10,000 contribution to your 401(k) or other pre-tax plan, your tax bill would increase by $2,500.

Despite the advantages of contributing, though, there may be a couple of arguments for reducing your 401(k) contributions. If you are concerned about losing your job and you don’t have much in an emergency fund, you might want to build up a cushion by temporarily reducing or eliminating your 401(k) plan contributions. But be realistic in assessing your job prospects. Far more people fear unemployment than actually end up unemployed.

Some argue that a Roth IRA contribution (if you qualify) is actually better in the long run than an unmatched 401(k) or 403(b) contribution. In the best of all worlds, you would do both, but if you have to choose between the two and you can forego the immediate tax break (Roth contributions are not tax deductible), the Roth may get the nod until your employer reinstates the match. 

I have been downsized and will have over a year of severance and benefits. I have a 401(k) and cash plan pension I would like to invest for monthly income. What do you suggest would be best way to do this without too much risk? –Ken, New Yor

The response to your question depends in part upon whether you plan to retire now or expect to reenter the workforce.

If You Are Retiring

Income is important for retirees, but so is the growth of your investments. Investing wisely in retirement requires a balancing act between investing for income in order to pay your bills and investing for growth in order to keep up with inflation over the decades. Even at today’s low inflation rates, most retirees will see their cost of living at least double over their lifetimes.

Unfortunately, interest rates on safe investments are very low now, although they rose a bit in the late spring. Therefore, you will need to take a bit of risk with your income-oriented investments if you want to earn more than a smidgen of interest on them. Here are some suggestions:

Safe investments: Safe investments are characterized by the almost absolute security that you won’t lose principal and, in most instances, immediate access to your principal. The “price” you pay for this safety is low interest, but for many beleaguered investors, that is a price worth paying these days. Safe investments include Treasury bills, CDs, money-market funds, and money-market deposit accounts. 

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