Stocks are falling, bonds are falling and, as a result, retirement savings for young and old have both taken a brutal blow, but experts say there is a way to get back on track.
Key points
- With the value of stocks and bonds falling significantly this year, workers have seen the value of their retirement portfolios hit hard.
- Experts say younger workers should cope with the downturn, or even consider increasing their investments by buying stocks when they are cheap.
- Retirees or those closer to retirement whose plans have deviated from the course have a difficult choice: live with less, work longer, or leave less to heirs.
Although the month was marked by gains, at Monday’s close, the S&P 500 stock index was down 19% from its Jan. 1 high. 1 Retirement accounts, which tend to invest heavily in stocks, especially for younger workers, are being trampled on. In the second quarter of this year, the Fidelity 401(k) average lost 20% of its value compared to the previous year. 2 To make matters worse, there is little security in bonds, a traditional haven against stock market volatility, and an asset of choice for those approaching retirement. Popular bond mutual funds are down 12% or more for the year. 34
Rarely do bonds fall as much as at the same time as stocks. In fact, in the past, bond yields have dampened stock declines 97% of the time, according to Joe Duran, managing director and head of Goldman Sachs’ Personal Financial Management, who cited historical research from Goldman Sachs. The last time bonds fell so much at the same time stocks were in the 1930s, he said.
The decline, triggered by the Federal Reserve’s rate hike to fight inflation, has only made pensions more difficult at a time when inflation is making the cost of living quickly more expensive. Among current pension savers, 42% said they lagged behind in a survey conducted by Goldman Sachs Asset Management in August. Those approaching retirement face more difficult decisions about how to make ends meet without incoming pay. 5
“When you have a portfolio, what does it mean to live off your savings?” Duran said. “And if the underlying savings decrease, and besides, the cost of living increases, what does that mean for your financial life? We are in very dangerous territory for a lot of people.”
That’s how pension experts say they have to respond to the setbacks facing markets and the economy this year.
If you’re still a long way from retirement, stay on track
If you regularly contribute to a 401(k) account through a constant automatic deduction from salary, you follow an investment strategy called dollar cos
t averaging, i.e. you buy a fixed dollar amount of assets through market ups and downs, no matter what the price is. The reason behind the dollar cost average is that it’s almost impossible to “time the market” and make sure you’re buying low and selling high.
“You stick to your plan,” said Nathan Voris, chief investment officer, knowledge and consulting services for Schwab Retirement Plan Services. “It’s very difficult to time the market, and that dollar cost average, those periodic savings, is a great way to buy in all shapes and sizes of markets.”
For most people, selling now to avoid further losses, or moving money from stocks to less risky investments would be a mistake, Duran said. (Some certificates of deposit (CDs), for example, are currently offered at an interest rate of 4% or more with little or no risk.)
“What happens if you reduce your risk? You don’t have a chance to grow,” Duran said. “In this environment, you might get a good return and 4% now, but what happens when interest rates drop a year from now and you’re not invested now? If the market recovers and you do not participate? This has ensured a permanently lower base on its retirement assets.”
If you’re nearing retirement, it might be time for some sacrifices
The situation is more complicated for older workers facing what Goldman Sachs called in a report earlier this month a “financial vortex” of high inflation and market volatility.
While younger workers may overlook a 20% drop in the value of their portfolio, it can be a big deal for someone who is retired or about to retire. But Duran said there is a way to make up for it.
For example, let’s look at someone whose retirement savings of $1 million are now worth only $800,000 and whose living expenses amount to about $50,000 a year. Working 18 months longer than originally planned can help offset losses, as can cut spending by 10% over four years (though that may be easier said than done when inflation is high).
Depending on your situation, there may be ways to get back on track without lowering your standard of living. For example, if you plan to leave a large amount of money to your children, you can reduce it, Duran said.
“If you’re concerned about making sure you have enough income, the best thing you can do is consider the things you can control,” Leslie Thompson, chief investment officer and co-founder of Spectrum Wealth Management, said in an email. “You can’t control what’s going on in the market, but you can control things like your expenses and discretionary spending habits and make adjustments there.”
In addition to expenses, investors can control what they save, how they time important life events such as pensioning and buying or selling homes, how much risk they are willing to take on their investments and the legacy they will leave for their children, Duran said. Changing one of those variables will affect the other.
“It’s all intertwined,” Duran said. “It’s like a cockpit on an airplane. If you move the lever, you have to move other items to stay in line and reach your desired destination… Everyone should reflect on the concessions they want to make.”
Should I ‘buy dip’?
One way to see the market downturn is as a time to grow your long-term retirement portfolio: you can buy stocks at a cheaper price now, knowing that your value is likely to recover at some point, if history is a guide.
“As long as one’s risk tolerance and time horizon are aligned with the potential for additional losses, I would actually say we’re in a good ‘for sale’ window for an average cash surcharge dollar in the market,” said Ashlea Jones, financial advisor at Prime Capital Investment Advisors in Cedar Rapids, Iowa. “We don’t think we’re at the bottom, but there’s always an opportunity for those with discipline and tenure to fight back.”
However, those who” buy the fall” to increase their retirement savings should be aware of the risks that come with that strategy.
“Are you really willing to raise your risk profile now?” Duran said. “And if you’re wrong, because it could be that we’re in the first year of a two-year downturn like we had in 2007, 2008.”
In other words, pension savers should only buy drops if they can withstand additional potential losses in the short term.
“If you’re young, this is a great opportunity to increase your wealth,” Duran said. “If you are retired, you may not think about increasing your equity exposure now.”
Younger workers think they are on their way to retirement, but what are they?
A recent separate survey by Goldman Sachs and Charles Schwab showed that younger and older workers view their retirement prospects very differently. In a Goldman survey, workers in Generation Z (the youngest age group studied) anticipate retiring younger than their older counterparts. Gen Z members surveyed were more likely to say they planned to retire around the ages of 60 to 64, and the least likely to say they planned to retire at any age after that. Gen X workers, on the other hand, are the oldest group to answer that question and are most likely to assign their pensions between 65 and 69. 6
Gen Z is also more likely than other generations to say their retirement plans are on the right track or much ahead of schedule, and are least likely to say they’re lagging behind.
In a Schwab survey conducted in April, 94% of Gen Zers said they are likely or very likely to meet their retirement goals. 7
Schwab’s Voris said one possible reason for the more optimistic assessment of younger workers compared to their older counterparts is that older workers, who are closer to retirement, have a much stronger idea of what their finances will look like.
Another reason may be that younger people have different ideas about what “retirement” means.
“People don’t really expect to retire, and more and more people are talking about part-time jobs or even full-time jobs,” Voris said. “It affects how much money you have to save for the amount of money you’re going to take out of your retirement account each month or each quarter.”
Duran said younger workers’ views on their future finances may also have been shaped by a good labor m
arket in recent years, where jobs have abounded and workers are in high demand, a condition that doesn’t necessarily last forever.
“A lot of these young people are really spoiled by a very aggressive economy approaching anyone who works
,” Duran said. “They can’t imagine a situation where the economy is more difficult.”
