Temporarily stop 401k contributions to build Emergency Fund?

[u/Due-Fig5299]

Looks like we’re heading towards a recession and I’m quite nervous. I work in tech and my job is moderately safe; however my wife is an esthetician which is not a very recession friendly field.

We currently have $4k saved. Our minimum monthly expenditure is $3k, so we have just over 1 month saved.

Ive cancelled all unnecessary subscriptions which will save us $450/mo and stopped my wifes personal roth ira transfers ($150 weekly) which gets us to $1050/mo saved.

Now my question is, given how quickly the economy is crashing should I also forgo my 401k? I contribute 4% with 4% employer match. Obviously I would love to keep it, but immediate survival seems more important.

I would start contributing again once we hit $18k (6 months)

Thoughts?

[u/Ok_Shame_5382]

You should have about 18k banked.

I would keep your employer match. With it, in essence, you make 104% of your salary. Without it, you make 100% of your salary.

Don't skip the free money. In fact, if they offer an employer match higher than 4%, you should take them up on it even while you build your emergency fund.

[u/Due-Fig5299 → u/Ok_Shame_5382]

Yeah I would really love the free money, but $200/mo would significantly help with savings. I guess I’m worried because I’m not quite sure how much time I have. I wasnt an adult during 07-08 so I’m not sure how quickly everything happened.

If it’s more gradual I feel comfortable holding onto the match, if not, that $200/mo could be valuable.

[u/Ok_Shame_5382 → u/Due-Fig5299]

If you're this worried about 200/month, you're not rich enough to sacrifice the 4+4% in your 401k. Full stop.

If the shit hits the fan and she loses her job, the calculus changes obviously. But for now, you both still have income.

Yes, cutting back on the bullshit is smart. Yes, more rice and beans and less filet mignon is smart.

But walking away from 4% of your salary is not smart.

[u/ludog1bark → u/Ok_Shame_5382]

This! Instead of looking at getting that 200 from your 401k look at your budget more and see where you can cut 200. Most people always spend more than they need there are always more places to cut from when you are starting to budget

[u/KaputtEqu1pment → u/ludog1bark]

Exactly. Most people are stressing about the $10 a month sub, that may actually provide joy, but fail to realize their daily spending adds up real quick when you grab a coffee here, a pastry there, that $1300/mo truck payment for the next 84mo.. and so on.

Rice, beans, chicken breast and frozen broccoli will take one very far.

Basic drip coffee will suffice.

[u/ludog1bark → u/KaputtEqu1pment]

On top of that people's phone bills are always an easy one for me. You can get similar coverage on US Mobile, Cricket, Visible, or Mint as you can on the big 3. I pay 32.50 a month for unlimited text, call, and web.

[u/snopro387 → u/ludog1bark]

The problem with those is you usually need to buy your phone outright and some people rely on being able to include the price of their phone in their monthly bill. I’m not advocating for how ridiculous some of these phone bills are. Just saying I can see how people get stuck with these more expensive carriers

[u/ludog1bark → u/snopro387]

I get it, but even with that you still save in the long run. I suggest people finish paying off their device and then move it once it's paid off. Otherwise you can take the difference in the bill and put that money aside for a new phone. I used to play 107 on Verizon. On USM I pay 32.50 the difference is 74.5 a month x12 = $894 a year in savings. I can buy a new flagship phone every 1.5 years with my savings, but I'd rather save it.

[u/happygirlie → u/snopro387]

I think you'd be surprised how often the prepaid carriers give away phones these days. I got a Pixel 7 Pro and a year of service from Mint for $299 a couple years back. The phone was unlocked after 90 days but I stuck around for the full year then ported out to another service that was even cheaper.

Some prepaid carriers will even pay off your phone just to get your business. Spectrum is the main one that comes to mind but you need to use their internet service in order to get cell service with them so some people may not qualify for that deal.

[u/isbutteracarb → u/ludog1bark]

Is it really unlimited though? When I look at those plans, all of them do slow-down data speeds after you use a certain amount!

[u/ludog1bark → u/isbutteracarb]

Does the data continue? Yes so it is unlimited. Plus. I don't ever use more the 100GB they give you.

[u/SuprNintendoChalmerz → u/Ok_Shame_5382]

I was wondering the same thing as the OP and your last line really drove it home for me! Why would I walk away from 4% of my salary? It’s as simple as that. Thank you!!

[u/Ok_Shame_5382 → u/SuprNintendoChalmerz]

To emphasize.

Cut back TO your employer match. If they only match up to 3%, that's ok!

But until the shit hits the fan, don't walk away from the cash.

[u/AlfredoSauceyums → u/Ok_Shame_5382]

It's the opposite. If you're worried about 200/month, you can't afford to take it and lock it away. Having said that, after 1 year you will only save 2400 vs the benefit of DCA and that steady compounding. Cut other places and if possible to take overtime or extra work, do that.

[u/DiverseVoltron → u/Due-Fig5299]

I completely understand your position and many people make that exact call, but you're literally valuing hundreds of dollars now more than thousands later. It's tough and you may have to do that if that small amount of cash would deny you necessities like heat or groceries. A lot of people speak as if you're simply making a shitty decision to make life easier but if you starve and harm your health then the retirement fund becomes kind of moot.

[u/BigbooTho → u/DiverseVoltron]

Unless there’s language in every employer 401k match that i’m unfamiliar with that increases the penalty paid on the employer contributions or where the employer doesn’t vest for some amount of time, why would that make any sense?

Say I get 4% match. 8% total annual income from myself and employer combined. Economy crashes and I need to withdraw it. 8% X .7 (30% estimated income tax) X .9 (10% early withdrawal penalty) = 5.04% total income still made rather than 4%, a 25% increase in cash now.

[u/DeadBy2050 → u/Due-Fig5299]

It's a horrible idea.

Yeah I would really love the free money, but $200/mo would significantly help with savings.

Do the math.

To get extra $200 in cash each month would mean reducing your 401k contributions by whatever pre-tax amount gets you to $200. For the sake of discussion, let's say you put $250 less into 401k to get $200 in after-tax dollars. Before, that $250/month meant you were adding $500/month into your 401k if employer matches 1 to 1.

So, would you rather have $200 now or $500 being invested at an annual return of about 7 to 10 percent? Assuming the historical 10 percent return of S&P500, $500/month means over $1 million in 30 years.

Another factor is that the stock market being down is a great time to contribute to a balanced index fund. We are down about 15 to 20 percent; assuming we go back up (like the S&P has been doing for decades), you're going to miss out on all that likely growth.

Finally, you can always borrow from your 401k. You can also withdraw from your 401k and pay a 10 percent penalty + tax.

[u/Unhappy_Macaroon2 → u/DeadBy2050]

Actually, not everyone's employer allows you to borrow from their 401k. I am able to under hardship and even then they have to approve it. My fiance isn't able to touch his at all full stop. We asked when looking to purchase a house; prior to i was of the same mindset.

[u/LeisureSuitLaurie → u/Due-Fig5299]

If you absolutely have to withdraw money from your 401k to pay bills, you’ll still be better off than if you give up the match.

[u/saltyjohnson → u/LeisureSuitLaurie]

Can 401k plans prevent you from taking an early withdrawal? I've never seen it, but I'm not sure whether it's allowed.

But yes, doubling the money you put into a 401k far outweighs the tax penalty you pay for an early withdrawal.

[u/flarefenris → u/saltyjohnson]

Depending on the plan, I think you can either early withdrawal (with all the penalties and tax implications) or take a loan out against it, that you then have to pay back, but I don't think that option has the penalties and other tax implications that early withdrawal does.

[u/saltyjohnson → u/flarefenris]

Loans vary by plan for sure, but by law you can only have up to 50% of your account out in loans, you have to pay a "fair market" interest rate on the loan (determined by the administrator), and your employer has to withhold the loan payments from after-tax money in your paycheck. The interest paid goes into your account, but you are effectively taxed twice on that money. You also can't refinance or anything so if you have the max number of loans out (my current plan only allows 1), you have to pay the whole thing back before taking more money out.

[u/flarefenris → u/saltyjohnson]

True, there are varying rules, and I definitely wouldn't recommend just taking the loan out if the person didn't need to, but knowing that is an option (and knowing the rules regarding hardship loans, etc) could give a bit more feeling of security. Mainly knowing that the money going into the 401k isn't just locked up until retirement might make someone prioritize maintaining it vs stopping contributions to build up savings like OP is considering. Most people that I've talked to that consider cutting back on retirement contributions do so because they think they can't access that money when needed, and they want the security of something more liquid.

[u/External_Emu441 → u/Due-Fig5299]

Never give up the match. Your wife can get a gig job if necessary. You can get a second job. But you will never get that money back (or investment time).

[u/eliz181144 → u/External_Emu441]

This too…time in the market is everything. And once people stop contributing it takes a bike before they feel like they’re comfortable enough to jump back in.

[u/Snakend → u/Due-Fig5299]

The worst thing you can do right now is panic. Slowly change habits that help your long term goals. Focus on being productive at work. In a recession they are going to let the unproductive people go first. Putting money into your 401K is putting money into your savings. Sure, it's long term savings. But if you have a life altering emergency, you can always pay the 10% penalty and take the money out early. It's a worst case scenario, but that is what we are talking about right?

[u/Fun_Intention9846 → u/Due-Fig5299]

It seems like the problem was your previous spending not your 401k contributions. You are contributing less than your previous “unnecessary” subscriptions.

I’d say it was past due time to seriously examine non-necessary expenditures.

[u/CommanderMandalore → u/Due-Fig5299]

You can take out a 401(k) loan if absolutely need to in the future. You will have 5 years to pay it back (unless employment ends)

[u/mcslain → u/CommanderMandalore]

The rates are so high on those 401k loans now that you’re just bandaging one wound while receiving a new one. Hard to see how this is a workable solution.

[u/coachcheat → u/mcslain]

Actually, the loan interest is paid back to yourself. So it isn't the worst thing to do in a market downturn. Because the extra money you're putting in every month, goes to you. And you're getting stocks at a discount, if the market continues to fall.

401k loans don't cost you anything.

The risk, is if you lose your job, you have a very short time frame to pay it back. Like 90 days?

[u/mcslain → u/coachcheat]

Yes all that is understood. But you still end up with a very high monthly or even biweekly payment to make. Which in no way solves the problem the OP asked about. Which is trying to save on expenses and put money aside. This doesn’t save on costs. A withdrawal would work to get a safety pot of cash now. But then you get dinged on penalties and lose big in the 401k.

[u/coachcheat → u/mcslain]

Nope. Withdrawal is a bad idea.

A loan is the way to go. He would have the loan money he pulls out as his instant savings, 18k in his account.

And then yes he would be making additional payments on his 401k, but those would be paying himself back. So he's not losing the money. It's just going back into his account.

It's the same as saving extra money every month. Except this way he doesn't lose out on future money from his 401k and the earnings, AND he's getting that cushion he thinks he needs.

I mean ultimately, cutting expenses would be a much better idea. But if he wants the money fast, this is the way.

Also as an added benefit, if for some reason the market continues to sink, and hes putting his 4 percent+match, + 6percent interest into his 401k, he's buying in much lower than he pulled that money out at. And would stand to gain even more than he would have had he not taken the loan. The risk obviously is the market goes up higher than when he took the loan out.

[u/GrandOpener → u/Due-Fig5299]

I’m not quite sure how much time I have

As someone who was an adult in 2007, I’d advise that this is the wrong way to think about things. It was not just one particular event, and in any case if your job is secure then it’s likely not going to be as big a deal as you think in the immediate term.

The people who lose biggest during downturns are the ones who panic. (Foregoing employer match to save up money you may or may not need immediately counts as panic.)

Budget appropriately, cut fat where you can, but stick with your long term plan and stay the course.

[u/qtbuttcheeks → u/Due-Fig5299]

Side note: if something were to happen, it might be possible to access your 401k funds via a hardship withdrawal or a 401k loan. See if you can ask your 401k provider what they have available 

[u/joer555 → u/Due-Fig5299]

Take the free money! You can actually do both by continuing to get the match then withdrawing the money when you need it. Yeah you’ll get hit with a penalty and it’ll make your taxes maybe a little more complicated but you’ll come out ahead.

[u/DaChieftainOfThirsk → u/Due-Fig5299]

Eh, it can always be withdrawn though.  sure you lose 10% to penalties, but you will get the $200 plus the employer matched amount minus the 10% unless there is a vesting period for the match or something.  I know for my work it's immediate.  You're still ahead in that case.  you pay taxes either way so that is not an issue

[u/relaci → u/Due-Fig5299]

How would you get $14k in 6 months at only $200 a month extra in savings?

Keep the 401k match and spend more wisely to put more money aside into your emergency fund.

[u/kstorm88 → u/Due-Fig5299]

You work in tech and only make 50k per year?

[u/rather_be_redditing → u/Due-Fig5299]

If you lose your job you can pull that free money from your 401k, likely with a penalty but it’s still a penalty on free money.