Stock market slump unsettling Americans eyeing retirement
Americans on the cusp of retiring are facing a tough choice as they watch their nest eggs shrink: Stay the course or keep working.
A stock market slump this year has taken 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 percent since its alltime high in early January.
The sharp reversal after a banner 2021 for Wall Street has been particularly unsettling for those who have been planning to retire sooner, rather than later, and banking on a healthier stock portfolio to help fund their post-work lifestyle.
It doesn’t help that the cost of everything from gasoline to food is up sharply amid the highest inflation since the 1970s. And that the Federal Reserve’s recipe for fighting inflation — hiking interest rates — has heightened fears the U.S. economy will slide into a recession.
The market skid has financial planners hearing more often from anxious clients seeking advice and reassurance in equal measure. They say some clients are opting to push back their retirement date in hopes that will buy time for their investments to bounce back.
“From late 2020 through 2021 we saw a wave of clients retire because of the large gains in the stock market and because they no longer wanted to work in the COVID ‘new normal’ work environment,” said Mark Rylance, a financial planner in Newport
Beach, California.
This year, half the clients who discussed retirement opted to still retire, while the other half decided to hold off, he said.
Historically, the stock market has tended to deliver positive returns within a year following steep declines. But unlike younger investors who can ride out Wall Street’s sharp swings, workers closing in on retirement don’t have as much time to make up losses from hefty market downturns.
Many soon-to-be retirees are also terrified about inflation, which can be “devastating” over decades, said Mark Struthers, a financial adviser with Sona Wealth Advisers in St. Paul, Minneapolis.
Social Security has a built-in inflation adjustment, but it doesn’t keep up with real inflation, and pensions — which far fewer workers have these days — often max out the inflation adjustment at 1.5 percent, he said.
He advises retirees who are worried about getting by on their savings to be willing to cut back on spending on big-ticket items. That could mean taking a big vacation every other year, instead of annually, or waiting 10 years rather than 7 to buy a new car. Struthers also strongly recommends that retirees work part-time.
Despite the market’s decline, investors like Mark Bendell in Boca Raton, Florida, are sticking to their retirement timeline.
The engineer decided early in 2021 that he would retire before the end of this year. The 62-year-old reviewed his finances with a financial adviser and came away confident he would be able to 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.
Other than tweaking his 401(k) to make sure it wasn’t heavily invested in more speculative holdings, Bendell hasn’t made any major changes to his investment strategy since he started his retirement countdown clock.
That approach, even during big market slumps, 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 percent of people with a 401(k) made a change to their plan’s allocation in the first quarter. That compares to 5.3 percent in the last three months of 2021 and 6.4 percent in the first quarter last year, the company said.
The set-it-and-forget-it strategy helped, but didn’t shield investors entirely from losses this year. The average Fidelity 401(k) plan balance stood at $127,100 in the first quarter, down 2 percent from a year ago and off 7 percent from the fourth quarter.
But Americans who’ve long been socking away money into 401ks and other retirement investment accounts are likely still well ahead. Consider: The 1.7 million investors who have had a 401(k) through Fidelity the past 10 years saw their balance soar by an average of nearly fivefold to $383,100.