Create multilayer savings plans
If you work for a company that halted its employer match, but your 401(k) plan still stands, you should continue to fund your 401(k) plan as you had in the past, says Phil Cook, a Certified Financial Planner with Mogul Wealth Management in Torrance, Calif.You should also ramp up your personal savings to make up for the missing match, but don't necessarily funnel all those dollars into your retirement account.
"I would not be overly aggressive in funding my retirement plan," says Cook. "Once you lock up money into a retirement account it's very expensive to take it out again because you'll owe taxes and penalties if you're under age 59½. Even when you reach retirement age, you'll still owe income tax on those contributions and, depending on your tax bracket, that can be expensive."
His advice? Direct new savings first into an emergency fund.
In today's economy, where layoffs are rampant and your employer has signaled financial vulnerability, every household should have three to six months' worth of living expenses set aside in a liquid, interest-bearing account such as a money market fund.
"You want to be sure you've got some kind of cash reserves on hand," Cook says. "You certainly don't want to sacrifice an emergency fund to fully contribute to your 401(k)."
When your employer match is suspended:
- Continue contributing to your 401(k) plan.
- Direct money into an emergency fund.
- Establish an investment portfolio.
- Open IRA after maxing out 401(k).
If you haven't done so already, he adds, now is also the time to establish an investment portfolio that is unrelated to your nest egg.
"Everyone needs semi-liquid assets, like stocks, mutual funds or gold coins," says Cook. "That way, if you lose your job, you can survive for the first six months on your emergency fund, and then start to liquidate your personal investments."
How much is enough? There's no magic number.
"Just start setting aside $200 a month for your investment portfolio," Cook says. "It'll take a while before it amounts to significant dollars, but you need to make your individual portfolio a priority."
Once your emergency fund is established and you're comfortable with the amount being directed toward personal investments, it's time to step up savings to your tax-favored retirement fund.
If you're not yet maxing out your 401(k), start there rather than opening an IRA, says Jack VanDerhei, research director for the Employee Benefit Research Institute in Washington, D.C.
"For many 401(k) participants, it would probably be better if they were looking at 10 to 20 investment options that the fiduciary has provided for them as opposed to being in an IRA and having literally thousands of different choices," he says. "I don't think most 401(k) participants would do sufficient due diligence in looking for what would be a correct investment alternative."