Should I stop contributing to my 401(k) and build up my cash?
I am 55 years old and losing my job in 6 months. My wife and I have zero debt, $38,000 in cash, $14,000 in mutual funds, and $1,400,000 in our IRA's. I want to accumulate a large cash cushion. Should I stop contributing to my 401(k) and just bank that money?
With the small amount of information you have given us, I would recommend that you put all your savings in cash at this time. The next 6 months should be about building your cushion. The more you can save the better. Your goal should be to give yourself enough time to find the next job and not having to compromise or panic...
If your cash amount is too low, you might eventually have to dip into your retirement savings which would be very costly. It is better at this point to lean on the conservative side until things get back to normal.
I hope this helps.
Sorry to hear you are losing your job. Good move to accumulate cash in order to create a cushion. However, remember that inflation will eat away at your cash value if the account or investment is less than about 3%. At the same time, you should avoid the early withdrawal penalty of having to pull from a retirement account. I recommend you park your cash cushion in an individual taxable account with a conservative to moderate ETF portfolio to diversify risk. This can help you fight inflation (and potentially grow your balance) while reducing risk and allowing withdrawals at any time without penalty.
The answer to your question is a bit more complex than it seems at first glance. Without more details, it will be hard to give you a good answer.
So are you planning to look for another job in six months? If not, then you should have enough liquid assets - cash, savings and mutual funds to cover the entire amount you and your wife will be without a primary income.
However, if none of you is planning to join back the workforce and you are in a high tax bracket it might make sense to max out your 401k contributions as long as you have enough money to cover your living expenses before you can start using your IRA and 401k funds.
I suggest that you speak to a financial planner who can review your situation in depth and provide you with recommendation specific to your situation.
Yes, it would be approriate to stop contributing to your 401(k) for a certain period of time to build up a larger emergency fund, especially since you are losing your job soon. You should be aware that this will increase your tax bill, though, due to the lower 401(k) contributions. Assuming you find another job soon and are able to resume your retirement savings, this extra savings in a taxable account can actually help with tax-diversification in retirement. Speaking of retirement, I would recommend at least a basic assessment of your situation to make sure that you are on track and can weather the job change appropriately.
If your goal is to accumulate a large cash position, then stopping funding 401k will do it. However, what are your ultimate goals? I imagine myself in your shoe, here are my concerns.
1) Would all of you savings last the three-decade of retirement? Based on your current annual living expenses, you can find the answer through an online calculator or with the assistance of a financial planner. If the outcome is you may run out of the money, then some proactive planning is a must.
2) Tax. Often people use 401k as a tax-minimizing tool. How will stop funding 401k affect your 2017 or future tax returns? Moreover, with a big balance in your IRA, how will the future RMDs affect your retirement tax and Medicare premiums? With the Medicare a decade away, this is a good time to have a strategy and slowly implement it to prevent future retirement tax hike.
3) LTC. How well are you prepared for the possibility of having chronical illness to use the home care services? If you haven’t given much thought, knowing 3 out of 4 people will use long-term care is a motivation enough to seek that risk reduction at age 55.
I’m sure there are other factors to consider. That’s why you need to consult with a pro, such as CFP® for your specific concerns. I’m glad you took the first step on the Investopedia platform, but individual consultation may be necessary for the next step. Best!