Reducing the contribution of the 401(k) may seem like a good idea in the current economy. With so much uncertainty from tariffs to speeches on the recession, we cannot blame them for wanting to pull back, dive and save as much as possible.
You’re not alone. It places emphasis on the hearts of many investors.
“It’s only been a while since I’ve been asking a question from a client. How will it affect your long-term financial roadmap if you make a 401(k) contribution) or change?” says Daniel Milan, managing partner and founder of CIO at Cornerstone Financial Services.
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Reducing your 401(k) donation when stocks are declining and costs are rising is an option, but it is not the best choice. It can cause irreparable harm to your retirement savings. This is the way.
401(k) Contribution reduction risk
1. Limit the likelihood of lifetime revenue
Save early and often mantra for many financial advisors. Compound interest means that the longer you save and invest, the larger your balance will be over time.
Along with compound interest, the interest earned on the investment will be added to the principal, and this new large amount will be recalculated for interest. This process occurs repeatedly over a set period, usually over months or years, depending on your investment.
We will bring $1.24 million 50-year-old individuals to a 401 (k) donating $27,500 a year ($23,500 is the 2025 limit, up to $7,500 for catch-up contributions for people over 50). Assuming a moderate growth rate of 1.26%, her balance will grow to $4.72 million in 20 years, says Milan.
If she reduces her contribution to $12,000 a year, her balance in 20 years is $4.16 million, or $600,000 less. “It’s not a minority,” says Milan.
Or what about this: Boldin, a financial planning tool company, has run two scenarios on Kiplinger.com for a 45-year-old married couple. If one spouse’s contribution is stopped, the chances of sufficient savings to retire will be reduced by 5%, and the property will be reduced by $2 million at a long-lived age.
The longer you reduce your contribution, the greater the impact. Reducing your contribution for six months won’t derail your retirement savings plan as if it had been maintaining low contributions for years or forever.
“If it’s inherently short-term, it doesn’t have a big effect, but when something becomes a new normal or habit, it can have a big effect over a decade or 20 years, as it reduces compound interest,” says Milan.
2. You will calm down for less
The phrase “old habits die hard” was not true. Once something is moved, it’s difficult to come back. That’s especially true with your 401(k).
A lower contribution rate could lead to a new baseline. This means you are lacking. After all, the overall purpose of the 401(k) plan is to pay yourself first.
“If you don’t contribute much, you lose that habit,” says Nancy Gates, lead educator and financial coach at Boldin. “When you get a job, you’ll automatically register up to a 3% or 4% game. You’re not even thinking about it. If you stop, you can’t go back to it.”
3. Missing opportunities for growth
While selling at a low price is the goal of most investors, in unstable markets, many people tend to oppose it.
If the market is scaring you and is why you are considering reducing your future 401(k) contribution, think again.
History proves that declining inventory tends to return. Reducing contributions when stocks are declining will result in less money that can benefit when the market is grateful again.
Stock recovered losses and then regained some after dot.com’s boom and bust, the Great Recession and COVID. Even today, the market has recovered somewhat from the sudden selling seen earlier this spring. Plus, if you continue investing when the market is falling, you can earn more stocks for your money.
4. Leave free money on the table
To reward you for saving for retirement, many companies offer a component that matches the company-sponsored 401(k)s. Your employer promises to match the percentage of your contribution, typically 3%-4%.
If you lower your contributions below the 401(k) match, you’ll leave free money on the table. Plus, I know drills. Less money in 401(k) means less money that can benefit from compound interest.
If you decide to do it, Milan says he will take note of the match.
“At least, we’re trying to attract the hardline, whatever the game is,” says Milano. “If it falls below that, in the short term, you’re giving up on the free money that’s part of your compensation package.”
5. It can push you into a higher tax frame
If you’re in the cusp that you’re in a higher tax range, donating too many to your 401(k) might push you up to the edge. Income that is not included in the 401(k) tax exemption counts as taxable income.
If Gates still wants to reduce their contribution, make sure they haven’t lowered it much to the more taxes they have to pay.
6. It can force you to work longer
I plan to retire at 65 or 66, but if I reduce my 401(k) contribution for a long period of time, my roadmap could be out of course. When you finish your workforce, you could create a retirement shortage that requires you to work longer or change your lifestyle.
Take a look at an example of Milan, where he donated $12,000 a year instead of $27,500, and ended up over $600,000 by the time he retired. Even if you have a 401 (k) less than $600,000,000, can you retire and live comfortably? Otherwise, you may be forced to delay your retirement for more than a year or two.
When that makes sense
Reducing the contribution of the 401(k) must be the last resort lever you pull and should only be used in extreme cases. If you can’t pay your bills or don’t have much debt, it may prove that it’s wise to tackle it first.
“When you’re starting your financial health path, the first thing you do is to pay your income and payments on time each time. The next goal is to have an emergency fund,” Gates says.
“The goal then is to pay off your high profit debt before saving for retirement. If you can’t pay your bills on time and your debt is high, then suspend your contribution until you’re in the right place.”
