Average retirement account balances are on the decline, but there is a bright spot for savers | Smart Change: Personal Finance
The first quarter of 2022 wasn’t kind to retired investors. pointer Standard & Poor’s 500 The index lost about 5% of its value while the technology-heavy index lost about 5% of its value Nasdaq 100 It fell more than 9%. If your retirement account holds any money in the broad market, you’ve felt the sting of this downturn.
A recent study from financial firm Fidelity confirms that many retired savers are in the same boat. The analysis found that average IRA account balances in the first quarter fell about 6% to $127,100 from the previous quarter. Average Q1 401(k) balances are down 7% from Q4, and are down at $121,700.
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The good news: down but not out
Retired savers lost their fortunes in the first quarter, which is never a good thing. But here’s the bright spot: The balance’s decline was in line with the market’s performance. This indicates that savers are largely staying on track with their retirement plans. Stocks are down, because the market is down — not because savers have sold their money or stopped investing.
Fixed Asset Allocation
The study also notes that only 5.6% of 401(k) savers changed asset allocation. This compared to 5.3% in the previous quarter.
Asset allocation is the composition of your investments across different asset classes such as stocks and bonds. Asset allocation significantly affects your exposure to risk. For example, a portfolio made up of 90% stocks and bonds will rise by 10% and fall closely with the stock market. In comparison, a mixture of 50% stocks and 50% bonds would be more stable.
Minimal asset allocation changes mean savers kept their cool during the down market periods in the first quarter. Large-scale allocation changes would suggest the opposite – that savers have panicked. Often this takes the form of lower equity exposure as investors sell to cut their losses.
The issue of staying in the course
Unfortunately for savers, the tough market continued beyond the first quarter. As of this writing, the S&P 500 is down more than 13% for the year, and the Nasdaq 100 is down 23%.
Even by dropping into the double digits, most retired savers would probably benefit from doing nothing. Keeping your wallet and allowances intact has two benefits. First, maintaining your holdings of stock qualifies you to make gains when the market recovers. Second, continuing to invest in stocks at lower prices will increase your stake count efficiently.
Selling now, on the other hand, initiates events that are likely to reduce your returns in the long run. To start, liquidation in a bear market generates less value. And switching to safer instruments like cash or Treasuries limits the potential for a rally later, since these will not go up when the market recovers.
You will also have trouble deciding when to invest in stocks again. Do it early and you may see unrealized losses after the event. Do it late and the stock prices will be high – probably much higher than they were when you sold. It’s a lose-lose situation.
keep calm and carry on
Turbulent markets happen, and it’s always hard to manage. You probably kept your cool in the first quarter of this year. As this market kicks in, keep channeling that calm.
Remember, the stock market has always recovered from a downturn – and emerged stronger on the other side. Keep a flat head and your 401(k) balance can do the same.
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