Stock market slump worries Americans looking to retire

Americans on the verge of retirement face a difficult choice as they watch their nest eggs shrink: stay the course or keep going.

This year’s stock market slump has snatched a great deal from investor portfolios, including retirement plans like 401(k)s. The S&P 500, the benchmark for many index funds, has fallen about 17% since its all-time high in early January.

The sharp reversal after the 2021 Wall Street banner was particularly worrisome for those who were planning to retire sooner rather than later, and who depended on a healthier stock portfolio to help fund their after-work lifestyle.

It doesn’t help that the cost of everything from gasoline to food has risen sharply amid the highest inflation since the 1970s. And that the Federal Reserve’s anti-inflation prescription – raising interest rates – has heightened fears that the US economy is sliding into recession. All of this is bad news for corporate earnings growth, which is a major driver of stock prices.

The slide in the market has financial planners often hear from anxious clients who seek advice and reassurance in equal measure. They say some clients are choosing to delay their retirement in the hope that they will buy time to get their investment back. Meanwhile, retirees who are already tapping into their investments may have to consider boosting their savings with a part-time job or deferring major travel or spending plans.

“From late 2020 through 2021, we saw a wave of clients retiring due to big gains in the stock market and because they no longer wanted to work in the ‘new normal’ of COVID,” said Mark Rylance, a financial planner in Newport. Beach, California.

This year, he said, half of the clients who discussed retirement chose to continue with retirement, while the other half decided to postpone.

Historically, the stock market has tended to generate positive returns within a year after sharp declines. But unlike younger investors who can weather the sharp volatility of Wall Street, workers nearing retirement don’t have time to recoup the losses caused by the huge market downturn.

“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 relies on her IRA to fund her retirement, which is just over 4 years old. But the downturn in the market made her nervous.

“I know I lost money, but I try not to panic and look at it every day,” she said.

Many soon-to-be retirees are also terrified of inflation, which can be “devastating” for decades, said Mark Struthers, a financial advisor with Sona Wealth Advisers in St. Paul, Minneapolis.

He said Social Security has an internal inflation adjustment, but it doesn’t keep pace with real inflation, and Pensions – which has far fewer workers these days – often drive up the inflation adjustment at 1.5%.

“Double is magical when it works for you, but destructive when it works against you,” Struthers said.

He advises retirees worried about managing their savings to be prepared to cut back on expensive items. That could mean taking a big vacation every two years, instead of waiting annually, or waiting 10 years instead of 7 years to buy a new car. Struthers also strongly recommends that retirees work part-time.

When stocks are in a downward spiral, investors traditionally funnel money into 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 offer less attractive. One high-quality US bond index has lost more than 9% so far this year.

Despite the market downturn, investors like Mark Bendel in Boca Raton, Florida, are sticking to their retirement schedule.

The engineer decided in early 2021 to retire before the end of this year. The 62-year-old reviewed his financial situation with a financial advisor and came out confident he would be able to live on 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, who is a teacher, plans to retire next year.

This is not to say that watching the stock market fall was not difficult.

“I take a strong drink about twice a week and then look at my investments,” Bendel said. “I don’t look as much when the market was going up.”

Other than adjusting his 401(k) to ensure he’s not invested too heavily in more speculative holdings, Bendell hasn’t made any major changes to his investment strategy since he began his retirement countdown clock.

“I stayed in the course,” he said. “Trying to time the market does not work, I believe.”

This approach, even during major market downturns, is typical among investors with 401(k)s or IRAs. Fidelity Investments’ review of 24,000 retirement investment plans found that only 5.6% of people with a 401(k) made a change to their plan 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-and-forget strategy has helped, but it hasn’t fully shielded investors from losses this year. The average balance of a Fidelity 401(k) plan was $127,100 in the first quarter, down 2% from last year and down 7% from the fourth.

Wall Street has been reaping gains more often than losses over the past decade. The market fell 34% in March 2020 at the height of the pandemic lockdowns and climbed to new highs a few months later. Last year, the S&P 500 posted its third best performance of the past decade, generating a total return of nearly 29%, including dividends.

This is why Americans who have always been making money in their 401ks and other retirement investment accounts are still ahead. Consider: 1.7 million investors with a 401(k) through Fidelity over the past 10 years have seen their balance go up nearly fivefold to $383,100.

However, as of the end of 2019, only about 60 million Americans had a 401(k) plan, according to the Investment Company Institute, an association that represents mutual funds.

It’s hard to keep stock market gains from previous years in perspective when an individual’s retirement account balance is shrinking day by day.

Meridian librarian Roberts said having the bulk of her retirement savings in her Irish Republican account as the market slumped was “disturbing.”

So, she leaves it in the hands of her financial advisor, who sends her regular updates and transfers some of her money from high-risk investments to mutual funds.

“They will move some money into cash if they have to temporarily,” she said.

Roberts works four days a week in a library, and spends the rest of the week taking care of her elderly mother and taking her to doctor’s appointments. If she had to, she could try to work five days a week, although that would be stressful.

“I want to spend time with my adult daughters, so I really hope I can still have an IRA,” she said.