A couple weeks ago, JoeTaxpayer discussed the need for an emergency plan. I found his post very interesting — basically, no matter what happens, if your choice is between a 401k with match or an emergency fund in the bank, your 401k is probably the better bet. You can always borrow the money back if needed, or in a really bad case, take it out as an early distribution.
Of course, there are a few downsides to this approach that I see:
- You’re saying that you can touch your retirement. Not a bad thing in itself necessarily, but this could quickly become a “slippery slope”.
- Once you start contributing above the company match, you may be better off just putting the money in a bank account for emergency purposes.
- 401k’s can lose value! If the economy crashes, and your mutual funds plummet, you may not have the money there.
- Even though access to funds from your 401k is relatively quick, it still takes time. For this reason, I’d still keep at least a couple thousand dollars in a bank account.
Certainly something to think about when we’re getting to the point of trying to build up a real emergency fund.
Your post today is right on target, the slippery slope you mention is certainly real, and my advice in this regard should always warn with words like ‘disciplined’ and ‘committed’. For some, my approach can work well, but for the wrong person, it may well be a formula for a blow up.
Vis a vis the market crash, I advise that is one were considering part of their account as emergency funds then they need to allocate accordingly. That portion of the 401(k) should be in the short term bond fund, for safety and lower volatility.
Again, I appreciate your taking the time to read my blog.
Joe