The financial markets of the past year were not only difficult to navigate but, when combined with sticky inflation, they made many Americans nervous about their retirement savings.
As Alight’s 2023 Universe Benchmarks Report noted, these worries were warranted: The average defined contribution retirement plan balance fell to $111,210 by the end of 2022, from $144,280 at the beginning of the year.
What’s more, the report found the median plan balance was $23,818, the lowest value in over a decade. Meanwhile, the median return for investors during 2022 was a shocking minus-14.7%.
Against that backdrop, it’s natural that many would have knee-jerk reactions in regards to their retirement plans. Yet, many experts argue that the best course of action is to actually do nothing.
“I know it’s tempting to panic and sell everything when our 401(k) takes a hit. After all, we’ve been through quite the mental and financial rollercoaster,” said Joe Camberato, CEO of National Business Capital. “But selling in a downturn will only lock in those losses, and that’s not a smart move.”
It’s important to remember that saving for retirement is a marathon, not a sprint, and workers should be sure to take a long-term approach when it comes to their retirement savings, said Mike Shamrell, vice president of thought leadership for Fidelity‘s workplace investing.
“Market conditions and the economic landscape will likely shift many times throughout your career,” he said, “but staying the course and not making changes to your retirement savings approach based on short-term market swings will keep you on track to reach your retirement savings goals.”
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For younger generations earlier in their career, it’s important to recognize the value of time in the market, said Amelia Dunlap, vice president of retirement solutions marketing at Nationwide.
“History tells us that most of the time the best thing you can do when markets crash is to avoid making emotional decisions about your investment strategy and stay the course,” Dunlap said. “The power of compounding is an incredibly important and often underestimated concept that younger investors should take the time to appreciate early in their career.”
Max Out Your Contributions
In addition, Camberato added, when the market is down, maximize your contributions to your 401(k) and seize the opportunity to buy.
Even if it takes a while for the market to bounce back, smaller gains like 4% to 8% per year in your 401(k) are just as good, if not better, than bonds, he added.
“They’re definitely more lucrative than keeping your money idly sitting in a bank account, earning paltry interest,” Camberato said. “These days, more and more retirees are keeping their money in stocks instead of moving them to so-called ‘safe’ bonds, like people did in the past.”
In addition, he noted that the real risk is inflation.
“Even if bonds are offering a 4% return, it’s not enough to keep up with long-term inflation,” he said. “If you’re part of the younger generation, time is on your side. Make the most of it, and max out that 401(k). And if you’re on the older side, you need that upside potential on your money to navigate through retirement successfully.”
Review Your Asset Allocation
If your 401(k) suffers a big loss, it may be time to look at your asset allocation.
“Especially this year, when the S&P 500 is up 15% so far in 2023, you should be asking some serious questions about the investment choices you or those who advise you are making,” said Bobbi Rebell, CFP, founder of Financial Wellness Strategies and author of “Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.”
“A realistic goal is to try to keep pace with the market,” she said. “If your account is losing value when the rest of the market is performing well, something needs to be fixed.”
Nationwide’s Dunlap also noted that market downturns can be more stressful for those close to, or in, retirement because they have less time to wait for the markets to recover.
“That’s why it’s important to adjust your investment strategy as you get older,” she said. “A financial advisor can help you look at the investment mix in your 401(k) portfolio and recommend options like target-date funds, which become more conservative as you get closer to retirement.”
In addition, many 401(k) plans offer free advice for participants who want to make informed decisions about adjusting their investment strategies.
Another piece of advice is to reduce withdrawals as much as possible, as nothing eats away at a portfolio more than withdrawing during a falling market.
“This is critical especially for retirees, who should consider cutting expenses where possible when markets correct, as reducing the drag on the portfolio will give it a far better chance to weather a downturn and recover,” said Glen Goland, CFP and senior investment advisor at Arnerich Massena.
Goland suggests considering a loan rather than a withdrawal for short-term cash needs, as withdrawals bring income tax liabilities and the potential for early withdrawal penalties if you are under age 59½.
“If you need cash from your 401(k), consider a loan that will allow you to pay yourself back, rather than further reducing your net worth by paying income taxes and penalties,” he said. “If you pursue this strategy through a market downturn, consider treating your loan as part of your allocation to fixed income and therefore increasing the percentage of non-loaned funds that is allocated to equities.”
What To Do Depending on How Far You Are From Retiring
If you are young or are years from retirement, you may want to increase your contributions to take advantage of lower stock prices during market drops. This is a valuable strategy because stocks and bonds are long-term investments and should not be judged on short-term results, said Bill Waggoner, president and chief compliance officer at Stoney Creek Advisors.
Now, if you are nearing retirement, you should rebalance your portfolio to reduce risk, he added.
“This means you should decrease the amount in stocks and increase the amount of bonds or stable investments that are less vulnerable to market volatility,” he said, adding that regardless of where you are in your career, if you are extremely conservative and do not want to risk anything, most 401(k) [plans] have stable value funds or fixed accounts that pay a fixed interest rate and are not affected by market downturns.
“But some tips transcend age, and the most important one focuses on maintaining your peace of mind.”
To that end, you should make sure that your 401(k) investments match your risk tolerance, which is how comfortable you are with risking your investment for potential gain, Waggoner explained. And if you do not know your risk tolerance, you should take a risk analysis test.
Finally, he said, make sure you are well diversified. Most 401(k) investments include mutual funds or index funds, so you likely already have some diversification. But, if you are not sure about the investments in your 401(k), you should contact a financial adviser, Waggoner said.
“Most financial advisers can help you analyze the investments and rebalance them to match your risk tolerance,” he said, “giving you the peace of mind of understanding your investments and how they can help you plan for retirement.”