Well, I was feeling lucky last week, but now BRKB is sliding with the rest of the market and I am officially in the red with all of my retirement accounts. This means everything is shrinking in value, and not that I’m actually in debt. Which I am. But not against those accounts. I don’t margin trade.
At any rate, I took a good long look at my new company’s 401k and the money I socked away into it in 2008. It’s about $6000 for my Year-to-Date contributions. Not too bad, but not too great either. It’s more than the minimum required for the corporate match. You see, I don’t get the match until I’ve been with the company for a year. Then, if I read the documentation right, I get a match up to 6% of my salary for that first year’s worth of contributions. After that, I get the match with each contribution.
At least, that’s what I think the documentation says. And if it’s true, then I get to stop putting in money right now because my account is down 20% this year and I would have been better off paying taxes on the money and putting all that cash into my pocket. Corporate match be damned.
Now that I realize that I can’t really make this 20% loss back for a good long while, I’m thinking of throwing the baby out with the bathwater and destroying my last goal of contributing to my 401k plan. I’d like to stop now thank you and put all that money towards debt reduction. It’s a surer bet for me financially than my retirement.
Sounds crazy. I know. I should be dollar cost averaging all these low share prices in my 401k.
But what do you think? Am I better off stopping my retirement contributions, paying tax on the income and using the extra take home pay to guarantee myself a rate of return approximating 6.75% on my credit card debt? (It averages out to less than 7% APR right now.)
Lots of places are saying do nothing different right now. Or bank cash for an emergency fund and be conservative in these trying times. Just this morning NPR had someone tell me that paying down debt now is the best action.
My rate of return on my 401k money is -20% for 2008. What do you think of a +6.75% rate of return in the form of less credit card debt?
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{ 7 comments… read them below or add one }
I’m maintaining my 401k contributions, though at a reduced rate. The company matches up to6%, so even though I can expect a negative rate of return, for the foreseeable future, on that 6%, the company match makes it a contemporary wash (or at least mitigates the loss significantly). I also have to contribute an additional 2% pretax to avoid a higher tax bracket, so I kept that.
I was at a high point of 15% contribution, however, and now I’m at 8%, and the balance is going toward paying down debt.
I hesitate to recommend cutting out contributions altogether (compound interest is, after all, a marvelous thing), but I certainly understand cutting back. In the long term (20+ years), your positions will probably make some gains, but there’s something to be said for short term peace of mind, as well. Maybe you can split it down the middle, cut back some, but not all, of your contributions?
Definitely maintain eligibility for the company match – corporate America does little enough for the average worker now, you should take advantage of the match if you can.
I’d pay off the CC’s. Recall that CC’s HAVE to be paid off with after-tax dollars. So multiply 6.75% by your marginal tax rate. That will be the _guaranteed_ return you will lock in if you pay off debt. Stocks will be cheap for a while, you’ll always be able to pick them up later…
It depends on whether you will actually pay off the credit cards or not. If you will, then it’s a reasonable suggestion (not nec. optimal), but if you are quite likely to charge them back up again, then probably not.
Pay off the credit cards, get out of debt. The markets aren’t done falling yet. You can start saving for retirement again once they are.
Have you heard of dollar cost averaging? Rochelle recommends timing the market (“markets aren’t done falling”), but how exactly does she know this? Now is the time to buy (unless you think that the dow is going to 0). The markets might still fall, but in the long run, they will rebound, and you’ll be glad you stuck it out. If you think the markets are still falling, re-allocate the investments into the money market option I bet your 401K has.
Paying off debt is admirable, but while you’re young is the best time to build a solid retirement base…
Hi Jason,
Yes. I know what dollar cost averaging is. But you see, I’m not all that young and it’s time to get serious about paying off my consumer debt.
I am still buying with regular 401k saving, but if I’m going to take a 20% loss on stuff, I do end up with a better rate of return by paying taxes and turning around and paying off my debt with the same funds. It’s just an idea… In the end, my 401k savings rate hasn’t changed much.
This was a great post! There is so much turbulence in the
market today, and people need peace of mind more than
ever. I wanted to offer your readers a link to another
blogger who is doing great work. He writes about our
childhood money messages’ and how the best approach to
stability in today’s market is to resist letting these
emotions control our buying/selling habits. It is really
fascinating work, and something you should all check out.
His name is Spencer Sherman, and you can view his blog at
http://www.curemoneymadness.com/blog.