All your life you've heard about the merits of saving for retirement in a 401(k) at work. You don't miss the money because it never hits your hands, you pump money into the investments regularly so you dollar cost average, and of course, if you're really lucky, your employer adds to your total with their contribution.
But, much as it may be hard to fathom the notion, there are some times when it might be best that you don't contribute to your company's 401(k), temporarily, or at all.
Here's when it's okay, to just say no.
You're deep in debt
Your mother probably told you, "first things first." She's right. Life is about priorities. Much as you want to start saving for retirement, truth is, if you're so deep in debt you're awake at night worrying about it and creditors are blowing up your phone, the wiser move is to pay down that debt before you start socking away money in your 401(k), or if you're already investing, suspend contributions for a time.
It's not an easy choice. Get help. "Decisions concerning whether to pay off current debt or contribute to a 401(k) should be discussed with a financial adviser," says Steven Shapiro, PhD., a New York Institute of Technology finance professor.
Is less more?
Before investing in a 401(k) you want to figure out if you can really afford to reduce your take-home pay by the contribution amount, after adjusting for the tax benefit, says David Altschuler, a certified financial planner.
Look at your monthly expenses. If you're having trouble meeting them, you may be better off not contributing, until you have a bit more wiggle room in your budget. Assess where you might make cuts in your budget to free yourself to contribute. The sooner you save for retirement, the better.
Are you prepared for the "what ifs"
Retirement is years away, but what about next month, three months from now or next year – the shorter term? If you should lose your job or get sick, would you have three to six months worth of emergency savings to keep you going? If the answer is no, re-consider saving in a 401(k) or reduce the amount you're contributing, until you accumulate an emergency fund.
"Should an emergency arise, money invested in a 401(k) is more difficult to access than money invested outside of one," says Aron Gottesman, professor of finance at Pace University's business school.
You don't want to have tap your 401(k). If you borrow from your 401(k) and leave the company, you'll have to repay the loan, or pay income taxes. Worse still, if you're younger than 59½, you'll have to deal with a 10% penalty tax on the remaining balance, plus ordinary income taxes.
Fees, fees and more fees
Investigate just how much the plan charges in fees, including administrative, investment and management fees. If they are around 2%, think twice about investing. That amount is sufficient enough to ruin any real progress on the road to saving for retirement.
There's little choice
If the plan at work has really limited investment choices and there's not much in terms of diversity, it might be worth looking into contributing to an IRA instead, as you will have broader investment options, says Pam Capalad, a financial planning analyst with WealthEdge.
You've got retirement covered
You do not need to contribute to a 401(k) if you are in line to receive a substantial inheritance that is enough to sustain you when you quit working, says Charles Murphy, vice president and CFO at American Investment Services.
There is a caveat. "But, it depends on how certain that inheritance is, and how liquid," he adds.
Murphy says that those in the $1 million-plus salary club don't need to worry about 401(k)s either. "You can easily build up enough money to use in retirement without putting it into the stock market, using municipal bonds, tax exempt bonds, cash and private investments such as real estate."
What you've heard about the 401(k) is right, it's a great way to save, and quite frankly, without it, many people would have no retirement savings. So choosing not to contribute isn't a decision to be made without much thought. Says Vincent Barbera, partner and wealth manager with Newbridge Wealth Management, "The general theme is the 'redirection of monies'. To stop contributing to a 401(k) just to pocket the excess is not an option. The money needs to be redirected to a source that is more important and has a higher priority at the time."