Thinking About Scaling Back Your 401(k)? Think Again.

As your 401(k) balance shrinks and the economy continues to slide into a recession, your first instinct may be to try to salvage what’s left of your retirement savings. In most cases, you’re probably better off not doing anything. At least for a while.

Contrary to what some people may think, now is not the time to decrease the amount of money you contribute to your employer-sponsored retirement plan. By doing this, you would be foregoing tax breaks associated with tax deferral, turning down “free” money from your employer’s match, and putting yourself at risk of not being able to make up for lost retirement savings after the crisis ends. Selling stocks is risky right now, too; you would probably be selling low after buying high, and that’s the exact opposite of a prudent investment strategy.

So what should a smart investor do in today’s economy?

Consider bumping up your 401(k) contributions. By increasing the amount deducted from your paycheck, you’re getting more for your money since most stock prices are low.

If possible, avoid taking money out of your 401(k). You’ll pay a penalty if you’re not retired, and you’ll be cashing out near or at the bottom of the market.

Resist taking a loan against your 401(k). These loans are risky if you suddenly lose your job and are forced to repay the loan. Penalties could be imposed if you can’t repay the loan immediately.

Diversify. Be sure your portfolio has a good mix of investments to reduce your risk. Or select a “lifestyle” fund to automatically shift to more conservative fixed fund investments as retirement nears.

Keep your emergency fund intact. Without a cushion for unexpected events – school expense, repair bill, medical crisis – you could quickly bust your budget.

Reduce your day-to-day expenses. You’ll be paying more for less in the future, so you’re going to need the extra money for higher-priced goods and services.

If your 401(k) has experienced sizeable losses, think about putting more money into your retirement accounts, working longer, or a combination of both. If you work more years than you’d previously intended, you’ll be saving for a longer period of time and building a bigger reserve, and you’re also reducing the number of years you’d be pulling money out.