Stocks Are Down. What Does That Mean for Retirement?

A decline in stocks and bonds means that retirement savings for both young and old have taken a hard hit – but experts say there are ways to get back on track.

If You Are Far from Retirement, Stay the Course

If you are regularly contributing to a 401(k) account through stable automatic payroll deductions, you are following an investment strategy called dollar-cost averaging – which means you are buying a set amount of assets through market fluctuations, regardless of the price. Dollar-cost averaging is a great way to buy in all shapes and sizes of the market.

For most people, selling stocks now to avoid further losses, or transferring money from stocks to lower-risk investments is a mistake, according to Duran. (For example, some certificates of deposit (CDs) are currently being offered with interest rates of up to 4% or more without any risk.)

“What happens if you cut back on your risks? You don’t have a chance for growth,” Duran said. “In this environment, you might get a good return and 4% now, but what happens when they cut interest rates a year later and now you haven’t invested? If the markets rise and you didn’t participate? You’ve locked in a permanent lower base on your retirement assets.”

If You Are Close to Retirement, It’s Time for Some Sacrifices

The situation is more complex for older workers who are facing what Goldman Sachs described in a report released earlier this month as a “financial spiral” of high inflation and market volatility.

While a younger worker can shrug off a 20% decline in their portfolio value, that can be a big deal for someone who is retired or about to be. But Duran said there are ways to offset that.

For example, let’s look at someone with a million dollars in retirement savings that is now worth $800,000 and living expenses of about $50,000 a year. Working for 18 months longer than originally planned might help offset the loss, as might cutting expenses by 10% for four years (although that might be easier said than done when inflation is high).

Depending on your circumstances, there may be ways to get back on track without having to reduce your standard of living. For example, if you plan to leave a large sum of money to your children, you could scale that back, according to Duran.

“If you’re worried about ensuring you have enough income, the best thing you can do is to think about the things you can control,” said Leslie Thompson, head of investment council and co-founder of Spectrum Wealth Management, in an email. “You can’t control what happens in the market, but you can control things like your expenses and discretionary spending habits and make adjustments there.”

In addition to spending, investors can control what they save, how to time major life events like retirement and buying or selling a home, how much risk they want to take in their investments, and the legacy they will leave for their children, according to Duran. One change in these variables will affect the others.

“Everything is interconnected,” Duran said. “It’s like the cockpit of a plane. If you move one lever, you will have to move other things to stay aligned and get where you want to go … everyone needs to think about the trade-offs they are willing to make.”

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Should I Buy Stocks at Discounted Prices?

The market downturn can be seen as an opportunity to enhance your retirement portfolio in the long run – you can buy stocks at a cheaper price now, hoping they will regain their value at some point if history is an indicator. “As long as someone’s risk tolerance and time frame align with the potential for further losses, I would definitely say we are in a good period to buy more cash in the market,” said Ashlea Jones, a financial advisor at Prime Capital Investment Advisors in Cedar Rapids, Iowa. “We don’t think we are at the bottom, but there’s always an opportunity for those with the discipline and commitment to hold on.”

However, investors buying stocks to increase their retirement savings should be aware of the risks associated with this strategy. “Are you really prepared to increase your risk profile right now?” said Duran. “And what if you’re wrong, because it could be that we are in the first year of a two-year decline like we were in 2007 and 2008.”

In other words, retirement savers should only buy stocks if they can bear further potential losses in the short term.

“If you’re young, this is a great opportunity to increase your stock allocation,” said Duran. “If you’re already retired, you’re likely not looking to increase your exposure to stocks at this time.”

Younger Workers Believe They’re on Track for Retirement, but Are They?

Recent surveys from Goldman Sachs and Charles Schwab indicate that younger and older workers view their retirement prospects very differently. In Goldman’s survey, Gen Z workers (the youngest age group studied) expect to retire at a younger age than their older peers. Members of Gen Z who were surveyed were more likely to say they plan to retire between the ages of 60 and 64, and less likely to say they plan to retire in any year thereafter. On the other hand, older Gen Z workers were the largest group to answer that question and most likely to indicate they plan to retire between the ages of 65 and 69.

Gen Z members were more likely than other generations to say their retirement plans are on track or ahead of schedule, and less likely to say they are behind. In a Schwab survey conducted in April, 94% of Gen Z reported they believe it’s likely or very likely they’ll meet their retirement goals.

Foris from Schwab said a possible reason for younger workers’ more optimistic assessments compared to their older peers is that older workers, being closer to retirement, have a clearer idea of how their finances look. Another reason could be that younger people have a different idea about what “retirement” means.

Foris said, “People don’t really expect to retire, and more and more people are talking about working part-time or even full-time.” “This affects how much you need to save for the amount you’ll be withdrawing from your retirement accounts each month or quarter.”

Duran said younger workers’ views about their financial future may also have been influenced by the strong job market in recent years, where jobs have been plentiful and workers in high demand – a condition that won’t necessarily last forever.

He said
Rotation: “Many of these young people have been coddled significantly by an economy that is desperately seeking anyone who will work”. “They cannot imagine a tougher economic situation”.

Do you have a question or comment or a story to share? You can reach Deacon at dhyatt@thebalance.com.

Source: https://www.thebalancemoney.com/stocks-are-down-what-does-that-mean-for-retirement-6824048

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