Company-wide layoffs amid rising AI spending have been a recurring headline this year.
One question we see concerned employees asking on social media is, “Should I pull back on my 401(k) contributions to have more cash on hand if my company is having massive layoffs?”
The reality is that it’s more about having a strategy rather than making any quick moves. While having cash on hand during uncertain times can be more valuable than maximizing your retirement saving in the short term, you don’t want to totally sacrifice long-term growth if you don’t have to.
If you anticipate possibly losing your job and you want to play it safe, here’s some advice.
Should you stop contributing to 401(k) during layoff?
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When it makes sense to pull back
Your first step of action is calculating how much emergency savings you have.
“If you don’t have the current self stable with short-term volatility, such as a layoff, then that needs to be the priority,” says Autumn Knutson, a Tulsa, OK-based CFP and founder of Styled Wealth, who doesn’t endorse any particular products mentioned in this article.
In this case of uncertainty, you should lower your 401(k) contributions temporarily if you don’t have a solid emergency fund, which is defined as three to six months of essential living expenses. That cash can then be redirected into a high-yield savings account where your money is safe, accessible and offers a somewhat decent return. This way, you’re boosting the cash you have on hand to buy time and reducing stress if layoffs do end up happening.
Knutson also adds that you can make up for the pause by contributing at a higher rate once your income is stable again. So, reduce how much you put into your 401(k) just enough to increase your monthly income and reassess in a couple months when you have a better idea of layoffs.
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When you shouldn’t reduce contributions
If you already have a solid amount of emergency savings in place while worried about layoffs, it’s worth still contributing to your 401(k) — this is especially true if your employer offers a match. A 401(k) employer match is essentially free money, so, at a minimum, contribute enough to earn that full match.
“That match is great for your future self,” Knutson adds.
The case for adding a Roth IRA
If the latter fits your situation — you’re worried about layoffs, but you have short-term savings and can still contribute enough to your 401(k) to meet your match — there’s a good argument for adding a Roth IRA to the mix. Cap your 401(k) contribution at the match amount then take any extra cash you were contributing and open a Roth IRA to supplement your retirement savings.
A Roth IRA operates differently from a 401(k) in that you’re contributing after-tax dollars so your money grows tax-free. IRAs in general tend to have more investment fund options than 401(k)s, too. A Roth IRA also gives you flexibility in uncertain times since you can withdraw your contributions (not earnings) at any time without taxes or penalties.
You can open a Roth IRA at big-name brokerage or through a robo-advisor:
Charles Schwab
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
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Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
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Bonus
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Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™, Schwab Organization Account and Schwab Trading Powered by Ameritrade™
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Investment options
Stocks, bonds, mutual funds, CDs and ETFs
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Educational resources
Extensive retirement planning tools
Pros
- $0 minimum deposit for active investing
- No commission fees for stock and ETF trades and no transaction fees for over 4,000 mutual funds
- Offers extensive retirement planning tools
- Users can get on-demand advice from a professional advisor/Schwab expert
- Robo-advisor Schwab Intelligent Portfolios® available as a no-fee automated service option (with Premium version available for a fee)
- Award-winning thinkorswim® trading platforms and all their cutting-edge tools are now available at Schwab.
- 24/7 customer support access by phone or chat
- Charles Schwab offers over 300 brick-and-mortar branches across the U.S. for in-person support
Cons
- Specific transactions may require commission fee
- Robo-advisor Schwab Intelligent Portfolios Premium charges a one-time planning fee of $300, then a $30 per month advisory fee. For that price, you get unlimited 1:1 guidance from a CFP, interactive planning tools, plus a personalized roadmap for reaching your goals
Fidelity Investments
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance for robo-advisor to start investing
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Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
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Bonus
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Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
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Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
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Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Pros
- No commission fees for stock, ETF, options trades
- No transaction fees for over 3,400 mutual funds
- Limited-time special offers
- Abundant educational tools and resources
- 24/7 customer service
- Over 100 brick-and-mortar branches across the U.S. for face-to-face support
Cons
- Fidelity Go® has a 0.35% advisory fee per year for balances of $25,000 and over
- Some of Fidelity’s mutual funds require reaching specific thresholds
- Reports of platform outages during heavy trading days
Betterment
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
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Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash
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Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Pros
- No trade or transfer fees
- Good for automated investing
- Customizes users’ portfolios around their financial goals, timeline and risk tolerance
- Users can assign specific investing goals (short- and long-term) to each portfolio and invest using different strategies (less and more risk)
- Quick and easy to set up account
- Able to sync external retirement accounts to your Betterment retirement goal so all your accounts are in one place. Premium plan users get unlimited access to a financial advisor (otherwise, one-time advisor consultations cost a fee ranging from $299 to $399)
- Advanced features include automatic rebalancing, tax-saving strategies and socially responsible investing
Cons
- Base price for investing accounts is $4/month – recurring monthly deposits totaling $250, or total Betterment account balances reaching $20,000, automatically switch you to an annual price of .25% of your investing account balances
- Premium plan requires $100,000 minimum balance
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