Given the sinking global economy and the beating your 401(k) balance has taken over the past 18 months, retirement may be the last thing on your mind. You might have more pressing worries, such as holding on to your job or building up an emergency fund. What's more, you may not feel comfortable pouring more of your money into the market. That's all understandable, but now is not the time to stop saving for retirement. A recent study by T. Rowe Price ( TROW) found that investors should strive to save at last 15% of their pre-tax salary to enjoy a comfortable retirement. That sounds like a lot, especially these days. Still, remember that saving for retirement may be the biggest financial challenge you'll ever face. "Saving any amount is better than nothing," says Greg Schultz, a principal at Asset Allocation Advisors in Walnut Creek, California. "Times are uncertain and people are nervous, but stopping now is not smart. The future will come -- sooner than you think -- and you will be really glad if you keep saving through these troubled times." Your 401(k): Feeding employer-sponsored retirement accounts, such as your 401(k) plan, may be especially important. One of Schultz's clients recently pondered stopping his contributions to pay down his mortgage aggressively. Schultz pointed out that, unlike extra mortgage payments, 401(k) contributions are pre-tax, employer matches amount to "free money" and earnings are tax-deferred. "When he looked at it that way, my client couldn't afford to not take advantage of all of those things," Schultz says.
Like any long-term investment, 401(k) plans benefit from the power of dollar-cost averaging. By making regular investments during bull and bear markets, you buy shares in every environment, more shares when prices are low and fewer when prices are high. Over time, this dollar-cost averaging means the prices you pay will average out, diluting risk. "If you only buy when times are good and prices are high and you don't buy when times are uncertain and prices are low, you've basically shot yourself in the foot," says Schultz. There will be bargains: The S&P 500 is down about 45% from its October 2007 high. And things may get worse before they get better. But there's another way to look at it: The market is on sale. This is the best time in many years to invest in stocks. If the market continues to fall, that's OK because it's better, over the long term, to buy on the way down than on the way up. Don't miss the bounce: Did you ever see something on sale, pass on it and then reconsider later, after the sale is over? If so, you missed a bargain. History tells us that the stock sale will end, too. What's more, the market tends to recover quickly after bear markets. Since 1957, the S&P 500 has fallen 20% or more nine times, according to JennisonDryden, the mutual fund management arm of Prudential ( PRU). The group found that in year one of a recovery, the S&P 500 gained an average of 36%. In year two, the average gain fell to 12%, followed by 1% in year three.
The lesson? When the market recovers, history suggests that the biggest gains will come early. The more money you've got riding that wave, the better off you'll be. Yes, the market feels risky. And yes, many investors are in dire straits. But those who stop saving for retirement now may well regret that decision.