Don't give up on the 401(k)

Don't let the gloom and doom of today dissuade you from doing what you need to do to have a more comfortable tomorrow.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: I'm trying to decide whether to participate in my company's 401(k) plan. I'd like to start contributing to it, but given what's going on in the markets and economy, I'm afraid this is just not the right time. Or is it? --Rudy H., Pearland, TX

Answer: I understand your ambivalence. But saving for your retirement isn't something you turn on or off based on what's going on in the economy or the financial markets at the moment. It's an activity that, ideally, you should start early in your career and stick to until you retire, through good times and bad.

Or, to put it another way, starting a 401(k) is a bit like entering a marriage. It's a long-term commitment, not a short-term fling. Or at least it should be.

If you're in the early stages of your career, you're going to be investing money that you won't even begin to touch for 30 or more years. And even people who are closer to retirement are still effectively contributing for the long term. After all, they're not pulling out all their dough the minute they hit 65. They're going to withdraw it over the course of many years.

That said, however, if I were going to factor current economic and financial conditions into the decision, I'd say that you can actually make the case that this is an excellent time for someone to be starting his or her 401(k).

I know that may seem counter-intuitive, even downright loco, given that the economy is in shambles and the stock market recently sunk to its lowest levels since the mid-1990s.

But history shows that you are most likely to earn the highest returns on the money you invest after the market has taken a severe beating. The reason, is that equities have their best long-term return potential when investors are most fearful of buying them. And there's no doubt that today most investors want as little to do with stocks as possible.

But I want to be clear here. I'm not suggesting that you plow all your 401(k) dough into stocks. You want to invest your 401(k) in a diversified blend of stocks and bonds based on how many years you have until you'll retire and on your tolerance for risk.

I also want to stress that by no means am I suggesting that by starting your 401(k) now you'll get a big immediate payoff. For all I know, stocks can fall even further from here before they eventually rebound. You should be focusing on the long-term. And even over the long-term, you're not guaranteed any particular rate of return. That's the nature of investing.

One more thing: People have a tendency to think that investing is the single most important issue when it comes to 401(k)s and retirement planning in general. But that's wrong.

Investing is certainly important. But even more crucial is making sure that you're saving enough in your 401(k), that you're taking full advantage of any employer matching funds and that you're making the most of other tax-advantaged savings options like IRAs.

If the recent market havoc has shown us anything, it's that we have very little control over the investment returns we'll earn. We hold much more sway, however, over factors like how much we save, when we start saving, how consistently we put money away and whether we dial back the risk level in our 401(k) portfolio as we age.

So assuming you do decide to start contributing to your 401(k) and invest in a balanced portfolio that's appropriate given your age and stomach for risk, I recommend you rev up a tool like our Retirement Planner. Then take a few minutes to run several different scenarios, such as starting your 401(k) now versus several years later and contributing different percentages of your salary.

I think you'll be surprised at how much an advantage getting an early start can give you -- and how much larger your eventual 401(k) account balance will be the more you contribute.

So don't let the gloom and doom of today dissuade you from doing what you need to do to have a more comfortable tomorrow. Sign up for that 401(k).

You can't dictate, nor ever know with any certainty, the return you'll eventually earn on your 401(k) contributions. But the sooner you start participating, the more you're likely to contribute. And you can know for sure that the more you contribute, the bigger your retirement nest egg will be.

Got a question for the expert? We want to hear from you. Post your video or typed question to Walter Updegrave's iReport page and your question could be answered in the next Ask the Expert column or video. For the CNNMoney.com Comment Policy, click here. To top of page

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