Don't miss out on 401(k) bargains

If you stop contributing to your retirement plan because the markets are getting hammered -- you could miss out on the sale of the century.

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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've lost a lot of money during this financial mess and I'm wondering when I should go back to putting 15% of my salary into my 401(K)? --Michelle Bonds, Rocky Mount, N.C.

Answer: Uh, how about like, right now.

I'm serious. I know that some people have reacted to this financial crisis by eliminating or scaling back their 401(k) contributions. A recent survey of plan participants by Spectrem Group found that 20% have cut the percentage of pay they contribute, while another 5% say they plan to do so over the next 12 months.

But no matter how rattled you may be, I don't see how stopping or lowering your contributions to your 401(k) or other retirement accounts helps you.

If anything, the events of the past year argue for saving more, not less. That's especially true since many employers are now trimming or eliminating matching contributions. Another survey, also courtesy of the people at Spectrem, says that 34% of employers have reduced or done away with their match and 29% plan to do so over the next 12 months.

Oh, I suppose if I really thought about it I could envision some rationale for paring contributions temporarily. Let's say you have absolutely no money set aside in an emergency fund. Given the all-too-real threat of being laid off these days, you could make a case that your first priority should be to accumulate at least three months of living expenses in a savings account, short-term CDs or a money-market fund. Doing so would prevent you from having to tap into your 401(k) -- and pay tax, plus a 10% penalty if you're under 55 -- to tide you over in the event you join the ranks of the unemployed.

Such a situation aside, however, you want to resist the urge to cut or halt your contributions to your 401(k).

Why am I so adamant about this? Well, aside from the fact that you would be foregoing the lucrative tax benefit of investing pre-tax dollars (and deferring taxes on gains in your account -- and yes, in the long-term I don't think it's rash to expect gains), there's a compelling investing reason to continue funding your 401(k) and other retirement accounts now.

Think of it this way. When stocks were booming in the late 90s or, for that matter, when they were at their highs in October of 2007, I got no emails from people saying they were thinking of stopping their 401(k) contributions. No, people are quite comfortable plowing money into their 401(k)s when stock prices are marching to new highs.

Fact is, though, the long-term return you'll likely earn on the money you invest after stocks have been on a long run or are at or near a peak is much lower than the return you'll likely get when you buy after stocks have been seriously hammered, as they've been over the past year.

Which brings us to one of the great ironies of investing in stocks. People are least comfortable investing in them when their future long-term return prospects are strongest and most comfortable buying when the outlook for future returns isn't as strong.

It would be nice if you could fund your 401(k) only when you're confident you're getting the best investment bargains. But that's unrealistic. Even if you could get around your natural reluctance to buy when stock prices are depressed, it's still hard to know in real time when stocks are most attractively priced for future gains. Besides, even if you could know this, it's not as if you have all your retirement money on hand ready to invest in a lump sum. You invest your money as you earn it over the course of your career.

That means that you'll be buying stocks (as well as other investments) for your 401(k) at a variety of prices and, in effect, earning a different long-term return on each dollar you invest. Sometimes you'll be investing at an advantageous time when stocks are cheap and you'll earn a superior long-term return. Other times you'll invest when they're expensive and you'll earn a subpar return. And you'll also invest at prices somewhere between those extremes.

The point is that if you invest only when stock prices are on a roll and abstain when they're in the dumps, you'll be buying in only when stocks are selling at the high end of their value range and missing the bargains. In a way, you would be like someone who always pays full retail and never takes advantage of a sale. This "only buy high" approach will limit the future size of your nest egg.

So for the sake of your future retirement security, I implore you to get back to contributing to your 401(k).

Oh, and when you do, make sure that your understandable concern about the money you've lost over the past year doesn't get in the way of investing your money appropriately for the future.

After all, as long as you're getting the contribution part right, you might as well follow through with the right investment strategy too.

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.  To top of page

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