Americans on the verge of retiring are faced with a tough choice as they watch their nest egg shrink: stay the course or keep working.
The stock market crash this year has severely affected investors’ portfolios, which include 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.
A Banner for Wall Street The sharp reversal after 2021 has been particularly troubling for those planning to retire sooner rather than later, and banking on a healthy stock portfolio their post-workout Doing banking to help fund the lifestyle.
It doesn’t help that the price of everything from gasoline to food is rising rapidly amid the highest inflation rate since the 1970s. And that the Federal Reserve’s prescription for fighting inflation – raising interest rates – has raised fears that the US economy will slide into recession. All of this is bad news for growth in corporate earnings, which is a major driver of stock prices.
When the market skids, financial planners hear more often from worried clients seeking advice and reassurance in equal measure. He says some clients are opting to push back their retirement dates in the hope that their investments will have time to bounce back. Meanwhile, retirees already tapping their investments may need to consider boosting their savings with a part-time job or discontinuing major travel or spending plans.
Mark Rylance, a financial planner in Newport, said: “From the end of 2020 to 2021 we saw a wave of clients retiring due to large gains in the stock market and because they no longer wanted to work in the post-COVID ‘new normal’ work environment.” ” Beach, California.
This year, half of the clients discussing retirement still opted to retire, while the other half chose to stay, he said.
Historically, the stock market has had a tendency to give positive returns within a year after a steep fall. But unlike younger investors, who can ride out Wall Street’s sharp swings, workers who are closing in on retirement don’t have as much time to make up for losses from a massive market crash.
“I’m a little scared — I don’t want to work until I’m 70,” said Nancy Roberts, a librarian in Meridian, Idaho.
The 60-year-old is relying on her IRA for her retirement, which is a little over 4 years away. But the fall in the market has made him feel stressed.
“I know I’ve lost money, but I’m trying not to panic and look at it every day,” she said.
Many soon-to-be retirees also fear inflation, which could be “catastrophic” for decades, said Mark Struthers, a financial advisor at Sona Wealth Advisors in St. Paul, Minneapolis.
Social Security has a built-in inflation adjustment, but it doesn’t, with real inflation and pensions — which very few workers have these days — often maximizing inflation adjustments to 1.5%, he said.
“Compounding is magical when it’s working for you, but devastating when it’s working against you,” Struthers said.
He advises retirees who are concerned about their savings to be prepared to cut spending on big-ticket items. This could mean taking a major vacation every other year instead of annually, 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 downtrend, investors traditionally move money into bonds, which are less risky than stocks. But bonds haven’t been sheltered from losses until recently. High inflation has made bonds, and the fixed payments they offer, less attractive. An index of high-quality US bonds has lost more than 9% so far this year.
Despite the market’s downturn, investors like Mark Bendel in Boca Raton, Florida, are sticking to their retirement deadlines.
The engineer decided in early 2021 that he would retire before the end of this year. The 62-year-old reviewed his finances with a financial advisor and is confident he’ll be able to live off his nest egg, which includes a 401(k) plan he’s been contributing to for nearly 34 years, a small Pension, savings and social security. His wife, Laurie, a teacher, plans to retire next year.
Not that it hasn’t been difficult to watch the stock market fall.
“I have Stiff drinks about twice a week, and then I take a look at my investments,” Bendel said. “I don’t see as much when the market was climbing.”
Other than tweaking his 401(k) to make sure it wasn’t heavily invested in more speculative holdings, Bendel hasn’t made any major changes to his investment strategy as he begins his retirement countdown timer. .
“I stayed on course,” he said. “Trying times doesn’t make the market work, and I believe that.”
This approach, even during major market downturns, is typical among investors with 401(k)s or IRAs. A Fidelity Investments review of 24,000 retirement investment plans found that only 5.6% of people with 401(k)s changed their plan allocation in the first quarter. The company said it is up 5.3% in the last three months of 2021 and 6.4% in the first quarter of last year.
The set-it-and-forget-it strategy helped, but didn’t 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 been making gains more often than losses over the past decade. The market fell 34% in March 2020 at the height of the pandemic lockdown and hit new highs a few months later. Last year, the S&P 500 posted its third best performance in the past decade, delivering a total return of nearly 29%, including dividends.
That’s why Americans who have been withdrawing money into 401ks and other retirement investment accounts for a long time are still likely to move on. Consider: The 1.7 million investors who held 401(k)s through Fidelity over the past 10 years grew their balances nearly five-fold to $383,100.
However, as of the end of 2019, only 60 million working Americans had a 401(k) plan, according to the Investment Company Institute, a consortium representing investment funds.
It’s hard to put the stock market gains of past years in perspective when one’s retirement account balance dwindles by the day.
Meridian’s librarian Roberts said the bulk of his retirement savings in IRAs have been “redundant” because of the market downturn.
So, she is leaving it in the hands of her financial advisor, who sends her regular updates and has shifted some of her money from high-risk investments to mutual funds.
“They’ll transfer some of the money to cash, if they have to temporarily,” she said.
Roberts works in a library four days a week, spending the rest of the week taking care of his aging mother and taking her to the doctor. If she had to, she could try working out five days a week, although that would be a strain.
“I want some time to spend with my adult daughters, so I’m really hoping that my IRA will hang,” she said.