The perfect time to contribute to a 401(k) is during a recession. In a recession, stock prices are generally depressed because earnings are generally depressed. Stocks tend to correct in a recession by 15% – 35%. Over time, stocks return 8-10% a year.
If you still have 10 years or more to go before retirement, you should absolutely continue to max out your 401(k) at the very least. Historically, recessions generally last between 6 – 24 months. Even the global financial crisis of 2008-2009 lasted under 12 months.
The time to invest is during a recession where you can accumulate more shares and earn a higher dividend yield. Over the long run, the stock market has proven to move up and to the right.
For 2023, the maximum employee 401k contribution is $22,500. The contribution limit will likely increase by $500 every couple of years forever. Meanwhile, the employer contribution limit also gets a $500 increase to $40,500, bringing the total annual 401k contribution limit to $61,000.
$61,000 is a huge sum of pre-tax money you can potentially receive each year for retirement, if your employer is profitable and generous enough. Employee profit sharing can really do a lot to boost your 401(k) retirement balance.
For participants ages 50 and over, the additional “catch-up” contribution limit will be $6,500. It’s interesting the IRS doesn’t want to give older folks an incentive to save more.
Max Out Your 401(k) During A Recession
Although your 401(k) alone will unlikely be sufficient to meet all your retirement expenses, if you max out your 401(k) every year, you will likely far surpass the median (~$18,000) and average (~$200,000) household retirement savings held by those between the ages of 56 – 61 today.
In fact, it is likely you will retire a 401(k) millionaire by the time you are able to withdraw from your 401(k) penalty-free at age 59.5. Check out the chart below that shows mow many years it will take for you to become a 401(k) millionaire based on historical returns and portfolio allocations.
In fact, I expect everyone to become 401(k) millionaires by the age of 60 if they keep maxing out their 401(k) every year for 30+ years. The power of compounding over time cannot be denied.
Related: Should I Make After-Tax Contributions To My 401(k)?
401(k) Asset Allocation
Unfortunately, the signs of a recession are increasing due to the war in Ukraine, high inflation, and aggressive Fed rate hikes. So be prepared. Learn how to make money during a downturn. Or at least position yourself and your net worth to outperform during a downturn by losing less.
If you are under 40, you probably want to have at least a 50% equity allocation or greater. Even a 50/50 equity/fixed income allocation has provided a historical 8.3% compound annual return since 1926.
Once you've maxed out your 401(k), it's time to ensure you are paying excessive fees. Sign up for Personal Capital, the best free financial tool on the internet to analyze your investments for excessive fees and make sure your retirement plans are on track. Just link all you financial accounts so it can properly analyze your net worth.
The more you can measure and track your net worth, the more you can optimize your finances to one day achieve financial independence.
Below is a snapshot of how Personal Capital highlighted $1,748/year in fees I had no idea I was paying. Over a 20 year period, the fees would add up to almost $100,000! You should take advantage of free technology to improve your financial life.
Always Contribute To Your 401(k)
You should always contribute to your 401(k), whether it's during a bull market or during a recession. Your 401(k) is one leg of the new three-legged retirement stool. Pensions are rare and Social Security may not fully pay out. At the end of the day, we must depend on ourselves to live a comfortable retirement life.
Given a recession is the most likely outcome by 2024, it's important to keep contributing to your 401(k) during downturns. Take advantage of lower prices to build a large 401(k) portfolio for retirement. After all, you won't be tapping your 401(k) until after age 59.5 anyway without penalty.
Finally, I recommend you also purchase a hard copy of my new book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. It will help solidify your finances so that you will be more protected in a recession and thrive during a bull market.
You can buy a hard copy of BTNT on Amazon right here. It is a #1 New Release and #1 Bestseller. I'm positive the book will provide you at least 100X more value than it costs! The book is based off 25+ years of experience working in finance and writing about finance.
About the Author
Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom. Should I Contribute To My 401(k) During A Recession is a Financial Samurai original post.