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2008: Bad Time to Invest in your 401k

By: Steve Johnson

1/30/2008 - 44 Comments

Investing in your 401k can be a great way to save for retirement, especially if you have an employer contribution.

The biggest advantage is the tax savings, because you don’t pay taxes when you put your money it – only when you take it out.  The theory is that your income will be lower in retirement and therefore you will pay less tax during retirement. 

The best time to invest in your 401k is when you have more money then you need and stocks are cheap.  But, neither of those conditions as true at the beginning of a recession.  Investing in the stock market when it is falling is not a good investment, because your balance will decrease with each investment.

Maybe you are not convinced that we are headed into a recession.  A very good indicator is a look at retailers, because 72% of the US economy is driven by consumer spending.  So for this year, retailers are seeing their worst start in 12 years – and when they report earning, their stock values will drop big time.

Reference article: Retailers Seeing Worst Start Since 1996

The dollar is also losing value by as much as 8% last year.  If your 401k increased by 8% last year, then you only broke even.  If you invest in US stocks this year you will likely lose 10-15% of your money, from the combined drop in stock prices and the continued drop in the value of the dollar.

Inflation is very hard on savers, because the money they have in hand today is worth less value than when they saved it.  Inflation is on the rise.  Almost all food commodity prices have hit record highs in the last few months. This will filter down into feed prices and eventually increase all meat prices along with everything made from wheat, corn and soy beans. The only thing that may not increase is lettuce and potatoes.

Reference article:  Inflation Rising Despite Slowing U.S. Economy

After we hit the bottom of this recession and the Fed starts to raise interest rates to fight inflation and the stock market has hit the bottom – then it will again be a good time to invest in your 401k.

So what should you do?

The best thing to do right now is to get yourself into a financial position that would allow you to live on half of your income. Here are a few ways to do that;

  • Start a budget
  • Pay down your debts
  • Start a savings account
  • Refinance your house (lower interest) or sell your house and buy a smaller house
  • Plant a garden

These ideas will help your family weather the coming recession and position your family to keep your house and food on the table.

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