Americans approaching retirement face a difficult choice as they watch their nest egg shrink: stay the course or keep working.
A stock market slump this year has taken a toll on investors’ portfolios, including pension 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 sharp reversal after a 2021 banner for Wall Street was particularly troubling for those who had planned to retire sooner rather than later and bet on a healthier stock portfolio to fund their after-work lifestyle.
It doesn’t help that the cost of everything from gasoline to food has soared amid the highest inflation since the 1970s. And that the Federal Reserve’s anti-inflation recipe – raising interest rates – has fueled fears that the US economy is slipping into recession. All of this is bad news for corporate earnings growth, which is a key driver of stock prices.
With the market down, financial planners are hearing more often from anxious clients who are seeking advice and reassurance in equal measure. They say some clients are choosing to postpone their retirement date in hopes that they will buy time for their investments to recover. Meanwhile, retirees already leveraging their investments may need to consider supplementing their savings with a part-time job or delaying major travel or spending plans.
“From late 2020 through 2021, we saw a wave of clients retiring because of the big gains in the stock markets 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 the customers who spoke about retirement chose to retire anyway, while the other half chose to delay it, he said.
Historically, the stock market has tended to post positive returns after sharp one-year falls. But unlike younger investors, who can weather Wall Street’s wild swings, workers nearing retirement don’t have as much time to recoup losses from severe market downturns.
“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 counting on her IRA to fund her retirement, which is just over 4 years away. But the market downturn has stressed her out.
“I know I’ve lost money, but I try not to freak out and look at it every day,” she said.
Many prospective retirees also fear inflation, which can be “devastating” for decades, said Mark Struthers, financial advisor at Sona Wealth Advisers in St. Paul, Minneapolis.
Social Security has built-in inflation adjustments, but it doesn’t keep up with real inflation, and pensions — which have far fewer workers these days — often exceed inflation adjustments at 1.5%, he said.
“Compounding is magic when it works for you, but devastating when it works against you,” Struthers said.
He advises retirees worried about making ends meet with their savings to be prepared to cut back on spending on big things. That could mean taking a big vacation every two years instead of annually, or waiting 10 years instead of 7 to buy a new car. Struthers also strongly recommends that retirees work part-time.
Traditionally, when stocks are in a downward spiral, investors switch money to bonds, which are less risky than stocks. But bonds haven’t been a haven from losses lately. High inflation has made bonds and the fixed payments they make less attractive. An index of high-quality US bonds is down more than 9% so far this year.
Despite the market downturn, investors like Mark Bendell in Boca Raton, Fla., are sticking to their retirement plans.
The engineer decided in early 2021 to retire later this year. The 62-year-old reviewed his finances with a financial advisor and was confident he would be able to live off his nest egg, which includes a 401(k) plan he’s been paying into for about 34 years, a small pension, savings and social security. His wife Laurie, a teacher, plans to retire next year.
Not that it wasn’t difficult to watch stock markets plummet.
“I have a stiff drink about a couple of times a week and then look at my investments,” Bendell said. “I don’t look the same anymore as I did when the market was climbing.”
Aside from tweaking his 401(k) to ensure it wasn’t heavily invested in more speculative holdings, Bendell hasn’t made any major changes to his investment strategy since starting his retirement countdown.
“I stayed the course,” he said. “Trying to time the market doesn’t work, and I believe it does.”
This approach is typical of investors with 401(k)s, or IRAs, even during major market downturns. A review of 24,000 retirement plans by Fidelity Investments found that only 5.6% of people with a 401(k) made a change to their plan’s allocation in 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 has helped but not fully shielded investors from losses this year. The average Fidelity 401(k) plan balance was $127,100 in the first quarter, down 2% year over year and down 7% from the fourth quarter.
Wall Street has made more gains than losses over the past decade. The market collapsed 34% in March 2020 at the height of the pandemic lockdowns and rallied to new highs a few months later. Last year, the S&P 500 posted its third-best performance in the past decade, delivering nearly 29% total returns, including dividends.
Because of this, Americans who have long been putting money into 401k and other retirement savings accounts are likely still way ahead. Consider this: the 1.7 million investors who have had a 401(k) through Fidelity over the past 10 years have seen their balances grow nearly fivefold, on average, to $383,100.
However, at the end of 2019, only about 60 million working Americans had a 401(k) plan, according to the Investment Company Institute, an association that represents mutual funds.
However, the price gains of recent years are difficult to put into perspective when the retirement assets are shrinking from day to day.
Having the majority of her retirement savings in her IRA when the market was down was “nervous,” said Roberts, Meridian’s librarian.
So she leaves it to her financial advisor, who sends her regular updates and has reallocated some of her money from riskier investments to mutual funds.
“They will temporarily convert some money into cash if need be,” she said.
Roberts works in a library four days a week, the rest of the week she takes care of her elderly mother and takes her to doctor’s appointments. If she had to, she could try to work five days a week, although it would be a drain.
“I want to spend some quality time with my grown daughters, so I really hope my IRA holds up,” she said.
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