The economy is a top concern for many Americans right now, especially those nearing retirement. With economists raising their forecasts and saying there’s nearly a 50% chance of a recession in 2025, people are feeling uncertain about their financial futures. If you’re worried, you might be considering boosting your emergency fund and pausing your 401(k) contributions.
But what’s the smart move? Financial experts say both an emergency fund and a 401(k) are essential parts of a strong financial plan. One secures your future while the other protects your present.
Your first priority should be building an emergency fund with at least 3-6 months’ worth of essential expenses. This acts as a financial parachute when life throws you a curveball like a job loss, medical bill, or major home repair. Without it, you might have to rely on credit cards or payday loans to get by.
Once you have that cushion, you can focus on investing. Your 401(k) is a powerful tool for long-term wealth, especially with tax advantages and employer matching. Experts recommend contributing at least 15% of your pretax income, including employer contributions, each year toward retirement.
Stopping 401(k) contributions at any age can be costly, but it’s especially significant if you have a long investment horizon.
Managing retirement amid economic uncertainty
For example, starting contributions of $6,000 a year at age 30 and retiring at 67, with a 7% annual return, could grow to nearly $1.1 million before employer contributions.
Adding those in would mean a very healthy nest egg. Contributing during market downturns also lets you buy low and potentially reap bigger rewards when it rebounds. And if you stop entirely, you lose out on any employer match, which is essentially free money.
Some people may decide their income will be irregular during a recession and a 3-6 month emergency fund won’t be enough. Personal finance guru Ramit Sethi recently recommended building a 12-month “war chest.” But he didn’t suggest stopping investments to do it. “That means cutting discretionary spending now, before the world forces you to,” he said.
Before cutting retirement contributions, look for easier budget wins like canceling unused streaming services, curbing food delivery, or pausing nonessential subscriptions. A financial advisor can help you find the best approach. But one simple strategy is to keep contributing enough to your 401(k) to get your employer’s full match once you have a 3-6 month emergency fund.
Then redirect anything beyond that to emergency savings until you hit your goal. Once your emergency fund is big enough to help you sleep at night, ramp those 401(k) contributions back up. The best financial plans don’t sacrifice long-term security for short-term panic.
They find a way to support both your present and future needs.
Image Credits: Photo by micheile henderson on Unsplash
