QUESTION: Bob in Tennessee is concerned about the fiscal cliff and wants to know how it will affect his 401(k). Dave says it depends on what the 401(k) is in.
ANSWER: Because it’s invested in mutual funds, then as the stock market goes, so goes your 401(k) and mine. You are not going to be using the money for over 10 years because of your age, probably 15 years. The fiscal cliff doesn’t directly affect the stock market. It comes down to the government overborrowing and overspending and not taxing the way some people want it taxed, or not raising revenue or not stimulating the economy and so on. That’s the definition of what this fiscal cliff is.
I don’t know what’s going to happen, but what seems likely is if they raise taxes like the Obama administration is proposing, I suspect we’re going to see a drop in the stock market because I suspect that’s going to harm the economy. That’s my opinion. That may or may not be true.
Is it a permanent drop in the stock market to where it ruins your retirement 10 or 15 years from now? No, I don’t think so. I’m going to let mine ride. I’ll cry when it goes down, but I’ll let it ride because I’m betting my 401(k) is going to outlive the Obama administration. That’s what it comes down to.
While you’re getting out of debt, stop your 401(k) contributions until you are out of debt, not including the house. That’s while you’re getting out of debt with the debt snowball in Baby Step 2. But that doesn’t have anything to do with the fiscal cliff–that has got to do with being totally focused on getting out of debt.
That doesn’t mean cashing out your 401(k) because you’re afraid of what’s going to happen to the economy. I’m not that afraid. I think they’re going to screw it up, but I don’t think they’ll screw it up so bad that the whole thing completely collapses.
Stop your 401(k) contributions completely; don’t worry about any company match. You need to get all crazy and focused and get your debt paid off real fast. No vacation and selling so much stuff the kids think they’re next. You guys have to roll up your sleeves and punch this debt thing in the face.
I don’t want you staying out of your contributions for years and years. If you stay out for a year or year and a half while you clear out your debt mess, then that is about normal with people going through a total money makeover.