As their savings grow smaller, Americans on the verge of retirement must decide whether to stay the path or continue working.
This year’s stock market downturn has taken a large bite out of investors’ portfolios, including 401(k) plans. Since its all-time high in early January, the S&P 500, the benchmark for many index funds, has dropped approximately 17%.
The rapid turnaround after Wall Street’s golden year in 2021 has been particularly disturbing for many who had hoped to retire sooner rather than later, relying on a healthier stock portfolio to help fund their post-work lifestyle.
It doesn’t help that prices for everything from gasoline to groceries are skyrocketing due to the biggest inflation since the 1970s. And that the Federal Reserve’s strategy of raising interest rates to combat inflation has heightened fears that the US economy may enter a recession. All of this is terrible news for corporate earnings growth, which is a major factor influencing stock prices.
Due to the market downturn, financial planners are receiving more calls from worried clients seeking both advice and reassurance. They claim that some clients are deferring retirement in the hopes of buying more time for their investments to recover. Meanwhile, retirees who have already depleted their resources may need to consider taking up part-time work or postponing large vacations or spending plans.
“We witnessed a flood of clients leave from late 2020 to 2021 because of big stock market gains and because they no longer wanted to work in the COVID ‘new normal’ work environment,” said Mark Rylance, a financial advisor in Newport Beach, California.
This year, half of the clients who talked about retirement decided to go ahead and do it, while the other half decided to put it off, he said.
Following significant falls, the stock market has historically delivered positive returns within a year. Workers approaching retirement, unlike younger investors who can ride out Wall Street’s wild swings, don’t have as much time to make up for losses from severe market downturns.
Nancy Roberts, a librarian in Meridian, Idaho, stated, “I’m a little concerned – I don’t want to work till I’m 70.”
The 60-year-old is relying on her IRA to pay for her retirement, which will begin in just over four years. However, she is concerned about the market’s downturn.
“I know I’ve lost money,” she admitted, “but I’m trying not to panic out and look at it every day.”
Many soon-to-be retirees are also concerned about inflation, which, according to Mark Struthers, a financial consultant with Sona Wealth Advisers in St. Paul, Minneapolis, maybe “devastating” over decades.
Social Security has an inflation adjustment built-in, but it doesn’t keep up with real inflation, and pensions — which far fewer people get these days — generally max out at 1.5 percent, he added.
“Compounding is magical when it works for you, but it’s awful when it doesn’t,” Struthers explained.
He urges retirees who are anxious about running out of money to be willing to cut back on big-ticket purchases. This could mean taking a nice vacation every other year instead of every year or waiting ten years instead of seven to buy a new automobile. Retirees should also work part-time, according to Struthers.
Investors generally shift money into bonds, which are less risky than equities, when stocks are in a downward spiral. Bonds, on the other hand, have not been a safe haven from recent losses. Bonds and the fixed payments they provide have become less appealing due to rising inflation. So far this year, one index of high-quality US bonds has lost more than 9%.
Despite the market’s collapse, Boca Raton, Florida investor Mark Bendell is sticking to his retirement plan.
Early in 2021, the engineer decided to retire before the end of the year. With the help of a financial expert, the 62-year-old was able to determine that he would be able to live off his resources, which included a 401(k) plan to which he had been contributing for 34 years, a small pension, savings, and Social Security. Laurie, his teaching wife, plans to retire next year.
It hasn’t been easy to see the stock market collapse.
“A couple of times a week, I have a heavy drink and then I look at my investments,” Bendell stated. “I’m not looking as closely as I was when the market was rising.”
Bendell hasn’t made any substantial adjustments to his investment strategy since he started his retirement countdown clock, aside from modifying his 401(k) to ensure it wasn’t excessively invested in more speculative items.
“I stuck to my guns,” he remarked. “I believe that trying to time the market does not work.”
Even during major market downturns, investors with 401(k) s or IRAs use this method. Only 5.6 percent of consumers with a 401(k) changed their plan’s allocation in the first quarter, according to a Fidelity Investments survey of 24,000 retirement investment plans. According to the firm, this compared to 5.3 percent in the last three months of 2021 and 6.4 percent in the first quarter of last year.
The set-it-and-forget-it approach helped, but it didn’t completely protect investors from losses this year. In the first quarter, the average Fidelity 401(k) plan balance was $127,100, down 2% from a year earlier and 7% from the previous quarter.
Over the last decade, Wall Street has accumulated more gains than losses. At the height of the pandemic lockdowns in March 2020, the stock market dropped 34% before rebounding to new highs a few months later. The S&P 500 had its third-best year in a decade last year, with a total return of about 29 percent, including dividends.
That’s why Americans who’ve been putting money into 401ks and other retirement investment accounts for a long time are likely to be ahead of the game. Consider: The average 401(k) balance of the 1.7 million investors who have had a Fidelity 401(k) during the last ten years has increased by nearly fivefold to $383,100.
According to the Investment Company Institute, an association representing investment companies, only approximately 60 million employed Americans have a 401(k) plan as of the end of 2019.
When one’s retirement account balance is shrinking by the day, it’s difficult to keep previous years’ stock market gains in perspective.
The fact that the majority of her retirement assets were in her IRA as the market fell was “unnerving,” according to Meridian librarian Roberts.
So she’s entrusting it to her financial adviser, who keeps her informed and has shifted part of her money from higher-risk investments to mutual funds.
“If they have to, they’ll temporarily transfer some money to cash,” she said.
Roberts works four days a week at a library and spends the rest of the week caring for and driving her elderly mother to appointments. She could work five days a week if she had to, but it would be difficult.
“I’m hoping that my IRA survives so that I can spend more time with my adult daughters,” she remarked.
