Given the sinking global economy and the beating your 401(k) balance has taken over the past 18 months, retirement may be the last thing on your mind.
You might have more pressing worries, such as holding on to your job or building up an emergency fund. What's more, you may not feel comfortable pouring more of your money into the market. That's all understandable, but now is not the time to stop saving for retirement.
A recent study by T. Rowe Price (Stock Quote: TROW) found that investors should strive to save at last 15% of their pre-tax salary to enjoy a comfortable retirement. That sounds like a lot, especially these days. Still, remember that saving for retirement may be the biggest financial challenge you'll ever face.
"Saving any amount is better than nothing," says Greg Schultz, a principal at Asset Allocation Advisors in Walnut Creek, California. "Times are uncertain and people are nervous, but stopping now is not smart. The future will come -- sooner than you think -- and you will be really glad if you keep saving through these troubled times."
Your 401(k): Feeding employer-sponsored retirement accounts, such as your 401(k) plan, may be especially important. One of Schultz's clients recently pondered stopping his contributions to pay down his mortgage aggressively. Schultz pointed out that, unlike extra mortgage payments, 401(k) contributions are pre-tax, employer matches amount to "free money" and earnings are tax-deferred. "When he looked at it that way, my client couldn't afford to not take advantage of all of those things," Schultz says.
Like any long-term investment, 401(k) plans benefit from the power of dollar-cost averaging. By making regular investments during bull and bear markets, you buy shares in every environment, more shares when prices are low and fewer when prices are high. Over time, this dollar-cost averaging means the prices you pay will average out, diluting risk.
"If you only buy when times are good and prices are high and you don't buy when times are uncertain and prices are low, you've basically shot yourself in the foot," says Schultz.