The best time to invest in a 401(k)? Now

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)

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NEW YORK (Money) -- Question: I'm 47 years old and would like to begin participating in my company's 401(k) plan. But I don't know if this is the right time to do so. Do you think I should start now or wait until the economy gets better? --Frank, Brighton, Mass.

Answer: Most issues in personal finance aren't digital -- yes or no, do this or that. There's usually more gray than pure black or white. Which means I don't often get a chance to be totally unequivocal. So I'm going to take full advantage of this opportunity:

Don't wait, Frank. Start contributing to your 401(k) pronto. Do the max if you can. Throw in catch-up contributions once you reach 50 if you can manage it. And don't stop until you retire.

I know that the events of the past year have rattled plenty of retirement investors. Even some people who have been participating in their 401(k) for years have begun to wonder whether it makes sense to hold off for a while and see how things play out.

But contributing to a 401(k) -- or any other retirement savings plan -- is a long-term discipline that you should adhere to throughout your career regardless of what's going on in the economy and the financial markets at any given moment. It's not an activity that you turn on and off in hopes of capitalizing on a soaring market or avoiding a bad one.

Why? Well, even though we know that the financial markets will have their ups and downs, we can't predict when they'll occur with enough precision for us to time our 401(k) contributions to exploit them.

Just look at this past year. Back in March, stock prices had hit a 12-year low and many people were worried that the wheels were coming off our economic and financial system. By your rationale, that would have been a terrible time to put money into your 401(k), since no one knew when, or for that matter if, the economy would get better.

But if you had followed your gut then -- which, come to think of it, you probably did, since you're still not participating in your 401(k) -- you would have missed out on the 50%-plus surge in stock prices that's occurred over the last eight months.

Fact is, when the economy is going through one of its periodic convulsions, it's impossible to tell when it will get back on track. And if you hold off investing during economic downturns and wait until you're absolutely positively sure that the economy is on the mend, you're going to miss the opportunity to do a lot of saving.

Let's take the last recession as an example. According to the National Bureau of Economic Research, the group that dates economic contractions and expansions, the recession before this one lasted eight months, starting in March of 2001 and ending in November of that same year.

But NBER didn't determine that the recession had ended and officially announce it was over until July of 2003, fully 19 months after the recovery had already begun.

It doesn't always take that long to get the official nod that the economy is in recovery mode again. But my point is that by the time you get hard evidence that the economy has turned a corner, the rebound will likely have already been well underway. And chances are the financial markets will be even further along since they typically lead the turnaround. Which means you'll probably miss opportunities to buy investments in your 401(k) while they're selling at attractive "pre-recovery" prices.

The other reason you don't want to focus on the short-term ebbs and flows of the economy is that such an approach is antithetical to retirement planning. Only by saving and investing regularly throughout our working years will most of us accumulate a nest egg large enough to maintain our pre-retirement standard of living. The 401(k) makes that sort of regular saving and investing possible in large part because of the ease and convenience of payroll deductions (the tax breaks don't hurt either).

Yes, your 401(k) balance will fluctuate as the financial markets go through their inevitable gyrations. But hanging in there and contributing regularly gives you your best shot at boosting the value of your account over the long term.

A recent study of 401(k) plans by the Employee Benefit Research Institute bears this out. EBRI found that the balances of workers who participated consistently in their 401(k) plans from 2003 through 2008 dropped 24.3% on average in 2008 due to the market rout.

But the study also showed that because of a combination of employee and employer contributions and investment gains before the crash, the average account balances of these consistent participants actually increased at an annual rate of 7.2% over that time period, even after factoring in the market crash.

Clearly, there are no guarantees of how much you or anyone else will eventually end up with by saving and investing through a 401(k). But the sooner you get started, the more sensibly you diversify and invest and the longer you stick with your 401(k) saving and investing regimen regardless of what's happening in the economy and financial markets, the better your chances of accumulating enough dough to support you in retirement.