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Plan Well, Retire Well

Saving and investing your money

Should I stop contributing to my retirement plan?

For years, I've done workshops for our own Extension staff encouraging them to enroll in the University's 403(b) plan. That's a voluntary retirement savings plan much like the 401(k) plans available for many employees of private companies. I'm always pleased when someone takes action and starts saving for retirement. But last week, I received this message:

Hi Karen,

A deduction of $80 is being taken out for retirement thru payroll and invested with "ABC Mutual Fund Company". It was just done for the first time this past paycheck. I plan to retire in probably five years?? Not sure yet.

Should I stop them taking money out because of the fear of it not being there???



I think "Babs" (not her real name, in case you were wondering) is asking a question that's on many people's minds right now, so I thought I'd share with you my response:

Dear "Babs,"

The main question is this: how long will this money be invested? Even if you retire in 5 years, you won't be taking all your money out of your retirement accounts at that time – you'll be tapping it gradually over a period of years. So most of your money might remain invested for 10 years or more. For long-term investments like that, you will probably come out ahead by investing the money in stock mutual funds or a combination of stocks and bond funds rather than keeping it in cash (like a money market account or CD). Historically, there have been very few 10-year periods (or maybe none...I can't remember for sure) that the stock market lost money. That's not a guarantee – it could happen. But losing money over longer periods like that is unlikely if you invest in a broadly diversified stock mutual fund. Investing in the stocks of individual companies, or in sector mutual funds that invest in just one industry, is much more risky.

You might think of it this way: today, you are buying stocks "on sale" (about 30% off) compared to what you were paying for them when you put money in your IRA these last couple of years. So it could actually be a good time to invest. At least, it's a better time to invest than when the market was 30% higher than it is today!

Investing through the 403(b) means that you're dollar-cost averaging: you're buying a set dollar amount of the same investment on a regular basis over a relatively long period of time. That makes the price fluctuations work in your favor. When prices are down, you will buy more shares. When prices are up, you will be buying fewer shares. It's a smart way to invest.

You might like to visit our Plan Well, Retire Well website and listen to some of the short PowerPoint segments in the section on Choosing Investments. They cover a lot of this.

Hope that helps. And I congratulate you for signing up for the 403(b).


By the way, I checked on that statistic about how many 10-year periods you would have lost money in stocks. Using data from Ibbotson, the Motley Fool says that both large cap and small cap stocks had positive returns in 59 out of 61 overlapping ten year periods.

Click on my name below to send me an email and let me know your questions about investing during these turbulent times.

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