Why Contribute to 403b

When the financial markets experience turbulence and uncertainty, it's natural to question investment strategies and their potential outcomes. A common concern among many is whether or not to continue contributing to retirement accounts like a 403(b) during such volatile times. Let's explore the reasons why you should still consider contributing to your 403(b) even when you feel the market "sucks."

Understanding the 403(b) Plan

A 403(b) plan is a retirement savings plan available primarily to employees of public schools, tax-exempt organizations, and certain ministers. It is similar to a 401(k) plan offered by private employers. Contributions to a 403(b) are usually made on a pre-tax basis, which can potentially lower your taxable income, and the investments within the plan grow tax-deferred until withdrawal.

Reasons to Continue Contributing to a 403(b)

1. Time in the Market vs. Timing the Market

   One of the core principles of investing is the value of "time in the market" versus "timing the market." Attempting to predict market movements often results in missed opportunities. By maintaining regular contributions to your 403(b), you're engaging in a practice known as dollar-cost averaging, which can mitigate risks associated with market volatility. Simply put, you buy more shares when prices are low and fewer when prices are high, averaging out your purchasing cost over time.

2. Compounding Returns

   The power of compounding is one of the most compelling reasons for long-term investing. Even during market downturns, the contributions you make today have the potential to multiply over the years, thanks to compounding returns. The longer your money remains invested, the more opportunity there is for growth, potentially offsetting periods of market decline.

3. Tax Benefits

   The tax-advantaged status of a 403(b) plan provides a dual benefit: immediate tax relief and tax-deferred growth. Contributions are made with pre-tax dollars, which can reduce your taxable income for the year. Additionally, you won't pay taxes on the earnings until you begin taking distributions, typically during retirement when you may be in a lower tax bracket.

4. Employer Contributions

   Many organizations offer matching contributions as part of their 403(b) plans. These matches are essentially 'free money' that aid in growing your retirement fund. Failure to contribute during market downturns might mean missing out on these valuable matches, which can significantly boost your retirement savings over time.

5. Lower Market Prices Mean Potentially Higher Future Gains

   While downturns can be alarming, they also present a buying opportunity. Lower market prices can allow you to acquire more shares of investments at a reduced cost. When the market eventually recovers, those who continued to invest may see substantial returns on these lower-priced acquisitions.

The Emotional Aspect of Investing

Investing during market volatility isn't just a financial decision—it can also be an emotional challenge. Here are some strategies to help manage the psychological pressure:

• Stay Informed, Not Overwhelmed: Educate yourself about market trends without letting news create anxiety. Understand long-term market behavior and historical recoveries.

• Stick to Your Plan: Having a well-thought-out investment strategy that aligns with your goals and risk tolerance is crucial. Stay committed to your plan, even when markets fluctuate.

• Consult a Professional: Financial advisors can provide valuable insight and reassurance during uncertain times. Their expertise might help you stay on course and make rational decisions instead of emotional ones.

Misconceptions About Stopping Contributions

Here are some common misconceptions and reasons why they might not hold up under scrutiny:

• "I Should Stop Until the Market Recovers." Halting contributions can lead to lost opportunities for purchasing lower-priced assets and furthering compound growth. It's challenging to determine when the market has 'fully' recovered, by which time you might have missed significant growth.

• "My Retirement is Far Away; I Can Pause for Now." While retirement might seem distant, the years will compound sooner than expected. Building a substantial fund requires time, patience, and consistent contributions.

• "Cash is King in Uncertain Times." Holding cash might feel safer during downturns, but inflation can erode its value over time. Investments have the potential to outpace inflation, especially when bought at lower prices during market dips.

A Comparative Look at 403(b) Strategy

Here's how continual contributions benefit compared to pausing during market downturns:

Practical Steps for 403(b) Participants

1. Review Your Asset Allocation: Ensure your investment mix is well-diversified, reflecting both your current risk tolerance and retirement goals.

2. Utilize Automatic Contributions: Set up automatic deductions from your paycheck to avoid the temptation of pausing contributions.

3. Re-evaluate Your Financial Goals: Regularly assess your financial situation and retirement objectives, adjusting your plan as necessary with ongoing guidance from a financial professional.

4. Take Advantage of Educational Resources: Many organizations offer workshops or online courses about financial planning and investment strategies. Staying informed can provide reassurance and understanding during volatile market periods.

Conclusion

While market downturns can be reasons for concern, they shouldn't deter you from contributing to your 403(b). The advantages of dollar-cost averaging, the power of compounding, tax benefits, and employer contributions underscore the importance of continued investment. Remember, your 403(b) is a long-term investment strategy designed to withstand short-term market fluctuations. By maintaining consistent contributions, you’re setting yourself on a steady path towards a financially secure retirement.

Keep exploring ways to enhance your understanding of financial markets and retirement planning. Consider discussing your options with a financial advisor who can help tailor strategies to your unique situation and guide you through turbulent times.