I don’t want to join the 401k because the market is too (high, volatile, unpredictable).
I get it. I deal with it every day but let’s discuss the difference between saving and investing. At some point in your life, you will need a bucket of money to supplement your income sources. I doubt social security will ever replace your income. It was never meant to.
Saving – putting some of your money away for a purpose. The purpose could be a vacation after the pandemic loosens up. It could be a new car you need to purchase in a few years or it could be retirement in 25 years. Let’s assume the company you work for offers a match of your contributions into the retirement plan. Let’s also assume the company matches every dollar up to 3% of your compensation and let’s assume there is a money market option inside the plan that you can invest your money into. First, every dollar you put in the plan will reduce your taxable income. Second, your money is going to double with the match. At the end of the year after putting $1,000 into the plan, your statement shows $2,000 because the money market earns 0%. Is $2,000 more than the $1,000 you contributed? Yes.
Investing – Your choice to potentially increase the earning power of your savings. Most retirement plans have options to choose ranging in levels of risk and return. Money market earning next to zero but offering stability to Small Cap stocks and International Funds and all points in between. The S&P 500 dropped almost a third in the early portion of the pandemic (March 2020) yet recovered by September and rose another 10%. The S&P also fell in 2007 and it took almost 6 year to return to prior levels. However, you need not be powerless during these times. You can change your allocation. We all know that market timing (choosing the exact top or bottom) is a fools’ errand. Continuing to invest during these times can help to buy lows.
I am hopeful during this pandemic due to the resiliency of the American people. Look at the way businesses have adapted to hold on. Restaurants who never did take out have set up and advertised their newfound means to deliver fine cuisine. Distribution of entertainment has and will continue to evolve. New businesses have started up. Consultants on how to work in a Zoom world and even Zoom itself. Products that did not exist a short time ago.
One piece of advice; learn how to make it work. Your savings, your investments, your benefits and even your individual talent. Give us a call and we will help.
Happy New Year.
The hypothetical example is for illustrative purposes only and should not be deemed a representation of past or future results. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.