I Stopped My 401k Contributions to Boost Our Emergency Fund—Is This a Smart Move?

A Reddit poster has indicated that she stopped her 401(k) contributions temporarily in order to bulk up her emergency fund.

She said that her husband is continuing to contribute to his 401(k) because he receives an 8% matching contribution. However, she doesn’t get matching funds for investing, and she wants to increase her emergency savings from $65K to $80K because the $65,000 she currently has saved would only cover 10 months of barebones expenses.

She also wants to put more money into emergency savings, rather than deposit $7,000 into her husband’s Roth IRA to max out that annual contribution.

So, is the Redditor smart to put off retirement savings to grow her emergency fund even more?

Delaying retirement investing comes at a big cost

If the Reddit user had no emergency fund at all, then pausing 401(k) contributions when she doesn’t earn an employer match might make sense. That’s because you can’t typically withdraw money from a 401(k) without getting hit with a 10% penalty unless you are 59 1/2. Investing all your money in a retirement account when you have no liquid savings in a high-yield savings account simply doesn’t make sense because you’d risk going into debt or having to take those early withdrawals if you face surprise expenses.

However, the poster already has $65,000, which is enough to cover 10 months of living expenses. That is a good amount of money, especially when most experts recommend that you have an emergency fund with three to six months of living expenses in it. While adding to savings is fine if the poster wants to do so for more security, she should not compromise on retirement investing in order to do that.

Waiting on retirement investing isn’t just a problem if doing so causes you to miss your matching contributions. You also lose out on compound interest that your money would have earned, as well as tax breaks that you get from 401(k) and IRA investments. Missing the benefits of a year or more of investment growth, plus the tax subsidies, to make an already generous emergency fund even bigger would not be the right move and could adversely affect the Reddit poster’s net worth. 

Rather than pausing retirement contributions, the poster should seriously consider both putting money into the Roth and putting around 15% of her income into her 401(k) or other retirement investments. It is not enough for the family to contribute to her husband’s 401(k) because she needs to be taking proactive steps towards securing her own retirement in case something happens to her husband, or to the marriage. 

If she has extra funds left over after accomplishing these important goals, then putting more of it into emergency savings is fine if she really wants to ensure she’s able to wait out even a long-term disaster. But, this goal of building an even bigger emergency fund simply comes at too high a price if it happens at the expense of retirement investments.

A financial advisor can help you decide where your money should go

The Reddit poster may also want to talk with a financial advisor about her options so she can better understand the best ways to use her money to grow her net worth. 

An advisor can evaluate all of her goals and objectives and help her make a comprehensive plan for how to use her income to build the best life possible both now and in the future. 

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