Americans who are on the verge of retirement are faced with a difficult choice, watching their eggs shrink: stay the course or keep working.
The stock market downturn this year has severely damaged investor portfolios, including retirement plans such as 401 (k) s. The S&P 500, a benchmark for many index funds, fell about 17% after its all-time high in early January.
The sharp reversal after the 2021 banner for Wall Street was particularly worrying for those planning to retire sooner rather than later, and were counting on a healthier portfolio of stocks to help fund their after-work lifestyle.
It does not help that against the background of the highest inflation since the 1970s, the cost of everything from gasoline to food has risen sharply. And the fact that the Federal Reserve’s recipe for fighting inflation – raising interest rates – has heightened fears that the US economy will slide into recession. All of this is bad news for corporate earnings growth, which is a key factor in stock prices.
Market drift makes financial planners more likely to hear from concerned customers who seek advice and reassurance equally. They say some clients prefer to postpone the retirement date in hopes that it will buy time for their investment to return. Meanwhile, retirees who are already enjoying their investment may have to think about increasing their savings through part-time work or postponing big travel or spending plans.
“From the end of 2020 to 2021, we saw a wave of customers retiring because of the large growth in the stock market and because they no longer wanted to work in the ‘new’ normal ‘COVID work environment,” said Mark Rylance, financial planner. from Newport. Beach, California.
This year, half of the clients who were discussing retirement decided to still retire, and the other half decided to postpone, he said.
Historically, the stock market tends to generate positive returns within a year after a sharp decline. But unlike young investors, who can overcome the sharp fluctuations of Wall Street, workers approaching retirement do not have enough time to make up for losses from major downturns in the market.
“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 woman expects her IRA to fund her retirement, which is just over 4 years away. But the fall of the market feels stressed.
“I know I lost money, but I try not to worry and look at them every day,” she said.
Many future retirees are also afraid of inflation, which could be “devastating” for decades, said Mark Straters, a financial adviser to Sona Wealth Advisers in St. Paul, Minneapolis.
Social security has built-in inflation adjustments, but it does not keep up with real inflation, and pensions – which today have a much smaller number of workers – often reach a maximum inflation adjustment of 1.5%, he said.
“A connection is magical when it works for you, but destructive when it works against you,” Straters said.
He advises retirees who are worried about managing their savings to be prepared to cut costs on big tickets. This could mean a big vacation every other year, not every year, or wait 10 years instead of 7 to buy a new car. Struzers also strongly encourages retirees to work part-time.
When stocks are in a downward spiral, investors traditionally transfer money to bonds that are less risky than stocks. But bonds have not been a haven for losses lately. High inflation has made bonds, and the fixed payments they make, less attractive. One index of high-quality U.S. bonds has lost more than 9% this year.
Despite the declining market, investors such as Mark Bendel of Boca Raton, Florida, are sticking to a retirement schedule.
In early 2021, the engineer decided to retire by the end of this year. The 62-year-old inspected his finances with a financial adviser and came confident he would be able to live off his nest, which includes a 401 (k) plan to which he has contributed for about 34 years, a small pension, savings and Social Security. His wife Laurie, a teacher, plans to retire next year.
Not to watch the stock market fall was not difficult.
“I drink strong drinks about a couple of times a week and then I look at my investments,” Bendel said. “I don’t look like when the market was up.”
With the exception of setting up his 401 (k) to make sure he was not invested in more speculative holdings, Bendel has not made any major changes to his investment strategy since the retirement countdown began.
“I kept the course,” he said. “Trying to distribute the market doesn’t work, and I believe it.”
This approach, even during large market downturns, is typical of investors with 401 (k) s or IRAs. A survey of Fidelity Investments 24,000 retirement investment plans found that only 5.6% of people out of 401 (k) made changes to the distribution of their plan in the first quarter. This is compared to 5.3% in the last three months of 2021 and 6.4% in the first quarter of last year, the company said.
The “establish and forget” strategy helped, but did not protect investors from losses this year. The average balance of the Fidelity 401 (k) plan was $ 127,100 in the first quarter, down 2% from a year ago and up 7% from the fourth quarter.
Over the past decade, Wall Street has been making more profits than losses. The market collapsed by 34% in March 2020 in the midst of a pandemic closure and rose to new highs in a few months. Last year, the S&P 500 reached its third-best figure in a decade, with overall returns of nearly 29%, including dividends.
That’s why Americans who have long deposited money in 401k accounts and other retirement investment accounts are likely still ahead. Note: 1.7 million investors who have had 401 (k) through Fidelity over the past 10 years have increased their balance sheet by an average of almost five times to $ 383,100.
However, as of the end of 2019, only about 60 million employed Americans had a 401 (k) plan, according to the Investment Companies Institute, an association representing investment funds.
However, the growth of the stock market in recent years is difficult to keep in perspective, when the balance on the pension account is declining every day.
Having the bulk of her retirement savings in her IRA when the market was declining is “troubling,” said Roberts, a librarian with Meridian.
So she leaves it in the hands of her financial advisor, who sends her regular updates and shifts some of her money from riskier investments in mutual funds.
“They will temporarily transfer the money in cash if needed,” she said.
Roberts works four days a week in the library, the rest of the week caring for an elderly mother and taking her to see a doctor. If she had to, she could try to work five days a week, even though it would be stressful.
“I want to spend time with my adult daughters, so I really hope my IRA gets stuck,” she said.