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Bail on 401(k)?

Question: I'm 54 years old with a 401k plan that is pretty much all my savings. I'm married and together we make approx. $80.000/year. We just recently put our two girls through college. In the last year my 401k has lost a third ($90,000)in a conservative very diversified fund. My question; do I cash out my 401k, pay the 10% penalty and put the money in my checking account that gets 5.00% interest? Thanks for your help. Jim, Clarksburg, MA

Answer: No one likes to see their hard-earned money fall sharply in value. It's tough to watch. But I'd leave your retirement savings alone. I certainly wouldn't pay the 10% penalty to get at the money unless I was standing on the financial precipice and it was the only way to prevent my family from falling. After all, you're still young and time remains on your side. You have a long time before it's time for you to consider retiring, let alone start making withdrawals.

A couple of thoughts: First, you could put new contributions into conservative fixed income investments. Second, you could stop funding the plan for a bit if you need to build up emergency savings. Again, it would be preferable if you did continue to save for your retirement. Hopefully, with your two children out of college you have some extra cash around to save outside of your 401(k). Third, I would take advantage of this experience to decide what you want to invest in with your retirement savings once the economy rebounds and the market turns up. (Yes, I am an optimist.) Last, it would still be better if you went even more conservative with the money in the fund--but still not take it out.

In the future, it seems to me that you might want to allocate more of your money into conservative options--such as Treasury Inflation Protected Securities--that preserve the value of your savings.

I think any of these options would be better than taking the money out of the 401(k) and putting it into a checking account.

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