To ride out bad times with 401(k) savings takes a plan

ByABC News
November 10, 2008, 4:01 AM

— -- The nation is experiencing what some have called the worst financial crisis since the Great Depression. And based on the sharp drop in the value of their 401(k)s, few American families would disagree. Now, more than ever, they need advice on how to deal with the crisis.

Jerry Costilow, for example, retired in 2004 because of health problems. For now he relies in part on Social Security Disability payments. Through the end of September, the value of his 401(k) was down more than 25%.

"My 401(k) is killing me," says Costilow, 63. "It's one of those things where you beat your head against a wall."

But 401(k) participants shouldn't just ignore their dwindling balances. And they need to avoid steps that could make their problems worse.

Among the biggest mistakes:

Stop contributing. During the past 12 months, 20% of consumers 45 and older stopped putting money into their retirement plans, according to a recent survey by AARP.

"You're missing out on free money," says Pamela Hess, director of retirement research at Hewitt. "When you stop contributing, you don't get any company match and so you're losing out." Keep in mind that when the market is going down, the company match will help cushion your losses.

Cash out. At a time when the market is crashing, some workers are withdrawing money from their retirement savings. During the past 12 months, 13% of older workers said they have prematurely withdrawn funds from their retirement plan, according to the AARP survey.

Unless you have no other way to deal with a crisis, it's a bad idea to withdraw money from your 401(k) plan before you reach retirement age.

For one thing, you take a significant tax hit, says Christopher Jones, chief investment officer for Financial Engines, which provides advice to 401(k) plan participants. There are early-withdrawal penalties, as well as the income taxes on the withdrawals. That could easily add up to 50% or more of the money you've taken out, Jones says.