Experts: How Much Do You Stand To Lose If You Pause Your Retirement Savings?

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A retirement savings account is something you should contribute to every month, without even having to think about it. That’s one of the advantages of a company sponsored 401(K) — the money is automatically deducted from your paycheck without you having to do anything.

But there might be times when you need to pause your retirement savings, such as if you lose a job or find yourself running deep into debt. The amount of retirement money you stand to lose by pausing your savings largely depends on how long you plan to pause it and how much you were saving to begin with.

If you push the pause button long enough, however, your retirement savings can take a big hit over time.

Research conducted last year by Morningstar analyst Amy Arnott looked into the amount of savings a 401(k) contributor would have built up between 2000 and 2020 under different scenarios. She specifically looked at the impact of three separate market downturns: the early 2000s dot-com bubble, the 2008 financial crisis and the early 2020 decline caused by the COVID-19 pandemic.

In each case, Arnott analyzed results under two different scenarios. One scenario looked at someone who started saving $500 per month in their retirement account and continued to do so throughout the two decades. The other looked at someone who stopped saving during downturns and then started again when the markets started to improve. Both scenarios assumed all 401(k) contributions were invested in stocks.

Are You Retirement Ready?

Arnott found that an investor who started saving $500 per month in January 2000 and kept doing so through the various market ups and downs would have ended up with about $359,000 in 2020. In contrast, the other “wait and see” investor would have finished with about $306,000.

In those scenarios alone, the person who occasionally paused their retirement savings would have lost $53,000 over 20 years vs. maintaining their regular retirement contributions.

The person who continued to invest would have come out ahead in all scenarios, including the dot-com crash, 2008 financial crisis and COVID downturn. This is mainly because of the compounding effect that helps accelerate savings over time — especially when your employer matches your contribution, which amounts to free money.

“Investors who already started contributing to a 401(k) would have had a more difficult time on paper, but the same principle applies: Putting contributions on hold while a 401(k) is losing money leaves you with fewer dollars that can benefit from an eventual rebound,” Arnott wrote in a November 2022 report. “The examples above make a pretty strong case for just sticking with the plan, even during a bear market.”

In addition, she noted that the above examples “probably overstate” the results for “wait and see” investors because they “assume that investors somehow knew ahead of time when the market was going to start recovering. In reality, it’s impossible to predict when the turnaround will happen.”

Are You Retirement Ready?

In nearly all cases, you’re better off continuing to contribute to your retirement savings even during economic downturns and stock market slumps, experts say.

“That’ll take some grit because it’s certainly not easy to see a drop in your life savings,” Eric Phillips, a chartered financial analyst and senior director of partnerships and strategic insights at 401(k) provider Human Interest, told USA Today. “Money can be emotional, and it’s hard to manage the fear, anxiety, and other emotions that have you worried about your financial picture today and tomorrow.”

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