Money Obedience

Many people have been wondering about the future of their retirement savings recently. Perhaps you’re nagged by worries – I know my wife is. She recently joked that she should cash in her 401K and stuff the money in the mattress to ride out the world’s financial turmoil. Do these questions pop into your head also: Should I continue contributing to my 401K plan? Should I lower my 401K contributions to have more cash on hand? What do I do about the investments I have already? Can I still enjoy a comfortable retirement even with things looking as bad as they do right now?

I certainly agree that the whole idea of holding 401k savings in today’s market is a little frightening. Lately, these hard-earned savings have gone down in value, and there may be worse to come. Our anxiety about retirement increases as the value of our retirement savings decreases. What do we do about this?

First, take a big, long, deep breath. That’s so you can think about this with a little less emotion, a little more clarity. Okay – first of all, we’re all still going to retire someday, right? Right. (We might have to change that date on our calendar, but that day will come!) Okay, well if we’re going to retire, we still have to plan for it, right? Right. Is having a 401k the best way to plan? For most people, the answer is an absolute yes. As I told my wife, we are saving in our 401k accounts because we want to use that money for retirement. We still plan to retire. So we still should plan to contribute to our 401k accounts. Sure, we may have to adjust our plans a little bit like work a little longer, but we are fully aware that our plan was never set in stone to begin with. (Hey, you’ve got to expect promotions, or changing jobs, or all kinds of things.) Since the plan was never a sure thing, changing the plan should not be such a big deal for us.

The same thing holds true for the allocation of our 401K funds into different investment accounts. We own certain funds in our 401k accounts because we think that in the long-run these investments will give us the best return considering how much risk we are willing to accept. When we invested in stock funds, rather than in the mattress account, we made the decision to accept the risk of declining stock prices in the hopes that we would fight against the impact of inflation. It’s just that we now happen to be experiencing the downside of this risk. But that does not change the generally accepted idea that investing in stocks is the best option for ensuring long-term savings plans work out in our favor.

I’m not trying to belittle the impact of the financial and economic situation we’re all facing during this roller coaster ride on the global economy. Neither my wife nor I are happy about seeing our savings go down in value. (Aren’t saving supposed to go up continuously over time?) But we also saw our savings go up in value quite a bit over the years, more than what we had expected when we first started saving. Nevertheless, the important lesson for us is this. We will continue saving money for our retirement and we will continue to invest in various funds that we believe support our long-term goals. It’s only when we decide that investments are far riskier than we are willing to accept that we will make a change.