Americans about to retire face a stark choice as they watch their nest egg dwindle: stay the course or keep working.
A stock market crash this year took a big bite out of investors’ portfolios, including retirement plans like 401(k)s. The S&P 500, the benchmark for many index funds, is down about 17% since its all-time high in early January.
The abrupt reversal after a 2021 banner for Wall Street was particularly troubling for those planning to retire sooner rather than later and banking on a healthier stock portfolio to help fund their after-work lifestyles.
It doesn’t help that the cost of everything from gas to food is soaring amid the highest inflation since the 1970s. And that the Federal Reserve’s recipe for fighting the inflation – the rise in interest rates – has heightened fears that the US economy is slipping into a recession. All of this is bad news for corporate earnings growth, which is a key driver of stock prices.
The slippage of the market means financial planners are hearing more often from anxious clients seeking both advice and reassurance. They say some clients choose to push back their retirement date in hopes of buying time for their investments to rebound. Meanwhile, retirees who are already leveraging their investments may need to consider bolstering their savings with part-time employment or postponing major travel or spending plans.
“From the end of 2020 to 2021, we saw a wave of clients retiring due to strong stock market gains and because they no longer wanted to work in the ‘new normal’ COVID work environment. , said Mark Rylance, a financial planner at Newport. Beach, California.
This year, half of clients who discussed retirement chose to continue retiring, while the other half decided to wait, he said.
Historically, the stock market has tended to generate positive returns in the year after steep declines. But unlike young investors who can ride out the big swings on Wall Street, workers nearing retirement don’t have as much time to make up for losses caused by sharp market declines.
“I’m a little scared — I don’t want to work until I’m 70,” said Nancy Roberts, a librarian at Meridian, Idaho.
The 60-year-old is counting on her IRA to fund her retirement, which is just over 4 years away. But the fall in the market stresses her.
“I know I lost money, but I try not to panic and look at it every day,” she said.
Many future retirees are also terrified of inflation, which can be “devastating” over decades, said Mark Struthers, financial adviser at Sona Wealth Advisers in St. Paul, Minneapolis.
Social Security has an inflation adjustment built in, but it doesn’t track actual inflation, and pensions — which far fewer workers have these days — often cap the inflation adjustment at 1.5. %, did he declare.
“The composition is magical when it works for you, but devastating when it works against you,” Struthers said.
He advises retirees who are worried about getting by with their savings to be prepared to cut back on big-ticket items. This could mean taking a big vacation every two years, instead of a year, or waiting 10 years instead of 7 to buy a new car. Struthers also strongly recommends that retirees work part-time.
When stocks are in a downward spiral, investors traditionally shift their money into bonds, which are less risky than stocks. But bonds haven’t been a haven against losses lately. High inflation has made bonds and the fixed payments they pay less attractive. A high-quality US bond index has lost more than 9% since the start of the year.
Despite the market decline, investors like Mark Bendell in Boca Raton, Fla., are sticking to their retirement schedule.
The engineer decided in early 2021 that he would retire before the end of this year. The 62-year-old went over his finances with a financial advisor and came away confident he could live off his nest egg, which includes a 401(k) plan he’s been contributing to for about 34 years, a small pension, savings and social security. His wife Laurie, a teacher, plans to retire next year.
Not that watching the stock market fall hasn’t been difficult.
“I have a drink about twice a week and then I look at my investments,” Bendell said. “I don’t watch as much as when the market was going up.”
Other than tweaking his 401(k) to make sure he wasn’t heavily invested in more speculative holdings, Bendell hasn’t made any major changes to his investment strategy since he started his account at countdown to retirement.
“I stayed the course,” he said. “Trying to time the market doesn’t work, and I believe it does.”
This approach, even during large market declines, is typical of investors with 401(k)s or IRAs. A Fidelity Investments study of 24,000 retirement investment plans found that only 5.6% of 401(k) holders changed their plan allocation during the first quarter. That compares to 5.3% in the last three months of 2021 and 6.4% in the first quarter of last year, the company said.
The set-it-and-forget-it strategy helped, but did not completely protect investors from losses this year. The average Fidelity 401(k) plan balance was $127,100 in the first quarter, down 2% from a year ago and 7% from the fourth quarter.
Wall Street has racked up gains more often than losses over the past decade. The market plunged 34% in March 2020 at the height of the pandemic shutdowns and hit new highs a few months later. Last year, the S&P 500 posted its third-best performance in a decade, delivering a total return of almost 29% including dividends.
That’s why Americans who have been hoarding money in 401k and other retirement investment accounts for a long time are probably still way ahead. Consider: The 1.7 million investors who have had a 401(k) through Fidelity over the past 10 years have seen their balances soar on average almost five times to $383,100.
However, at the end of 2019, only about 60 million employed Americans had a 401(k) plan, according to the Investment Company Institute, an association representing investment funds.
However, previous years’ stock market gains are hard to put into perspective when the retirement account balance is shrinking day by day.
Having most of his retirement savings in his IRA as the market went down was “disconcerting,” said Roberts, Meridian’s librarian.
So she relies on her financial advisor, who sends her regular updates and has moved some of her money from higher-risk investments to mutual funds.
“They will move cash if they have to, temporarily,” she said.
Roberts works four days a week at a library, spending the rest of the week caring for his elderly mother and taking her to doctor’s appointments. If she had to, she could try to work five days a week, even if it would be a constraint.
“I want to spend time with my adult daughters, so I really hope my IRA holds up,” she said.
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