Stocks Are Down. What Does That Mean for Retirement?

Should I sell my stocks, or buy the dip? Retirement experts weigh in

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Stocks are down, bonds are down, and as a result, retirement savings for young and old alike have taken a brutal hit—but experts say there are ways to get back on track.

Key Takeaways

  • With the values of stocks and bonds down significantly this year, workers have seen the values of their retirement portfolios take a serious hit. 
  • Experts say younger workers should ride out the decline, or even consider boosting their investments by buying stocks while they’re cheap. 
  • Retirees or those closer to retirement whose plans have been thrown off course have tough options—live on less, work longer, or leave less to heirs.

Despite a month marked by gains, as of Monday’s close, the S&P 500 stock index was down 19% from its peak on Jan. 1. Retirement accounts, which tend to be heavily invested in stocks, especially for younger workers, are getting trampled. In the second quarter of the year, the average Fidelity 401(k) lost 20% of its value compared to the year before. To make matters worse, there was little safety to be found in bonds, the traditional refuge against stock market volatility, and the preferred asset for those closer to retirement. Popular bond mutual funds were down 12% or more on the year. 

It’s rare for bonds to fall this much at the same time as stocks. In fact, in the past, bond performance has buffered stock declines 97% of the time, according to Joe Duran, managing director and head of Goldman Sachs Personal Financial Management, who cited historical research by Goldman Sachs. The last time bonds fell this much at the same time as stocks was in the 1930s, he said.

Those declines—brought on by the Federal Reserve hiking interest rates to combat inflation— have only made retirement more challenging at a time when inflation is making the cost of living rapidly more expensive. Among current retirement savers, 42% said they were behind schedule in a survey conducted by Goldman Sachs Asset Management in August. Those close to retirement are facing tougher choices about how they will make ends meet without a paycheck coming in.

“When you have a portfolio, what does it mean to live on your savings?” Duran said. “And if the underlying savings are going down, and in addition, the cost of living is going up, what does that mean to your financial life? We're on very treacherous ground for a lot of people.”

Here’s how retirement experts say you should respond to the setbacks the market and the economy have dealt this year.

If You’re Far From Retirement, Stay the Course

If you regularly contribute to a 401(k) account through steady automatic paycheck deductions, you're following an investing strategy called dollar-cost averaging—that is, you’re buying a set dollar amount of assets through the ups and downs of the market, no matter how they’re priced. The reasoning behind dollar-cost averaging is that it’s nearly impossible to “time the market” and ensure that you’re buying low and selling high.

“You stick with your plan,” said Nathan Voris, director of investment, insights, and consultant services at Schwab Retirement Plan Services. “It’s very difficult to time the market, and that dollar-cost averaging, that periodic savings, is a great way to buy in all shapes and sizes of the market.” 

For most people, selling now to avoid further losses, or moving money out of stocks to less risky investments would be a mistake, Duran said. (Some certificates of deposit (CDs), for example, are currently being offered with interest rates of 4% or more with little to no risk.)

“What happens if you reduce your risk? You have no opportunity to grow,” Duran said. “In this environment, you might get a nice yield and 4% right now, but what happens when they drop rates a year from now and now you're not invested? If the markets rallied and you didn't participate? You've locked in a permanently lower base on your retirement assets.”

If You’re Close to Retirement, It May Be Time for Some Sacrifices

The situation is more complicated for older workers facing what Goldman Sachs called in a report earlier this month the “financial vortex” of high inflation and market volatility. 

While a younger worker could ignore a 20% drop in the value of their portfolio, it could be a major problem for someone who’s retired or just about to be. But Duran said there are ways to make up for it. 

For example, let’s look at someone whose $1 million in retirement savings is now only worth $800,000 and whose living expenses add up to about $50,000 a year. Working 18 months longer than initially planned might help make up for the loss, as could reducing expenses by 10% for four years (although that might be easier said than done when inflation is high).

Depending on your situation, there may be ways to get back on track without reducing your standard of living. For example, if you were planning to leave a substantial amount of money to your children, you could scale that back, Duran said.

“If you are concerned about ensuring you have enough income, the best thing to do is to keep in mind the things you can control,” Leslie Thompson, chief investment officer and co-founder of Spectrum Wealth Management, said in an email. “You cannot control what is happening in the market, but you can control things such as your expenses and discretionary spending habits and make adjustments there.”

In addition to spending, investors can control what they save, how they time major life events like retirement and buying or selling a home, how much risk they’re willing to take in their investments, and the legacy they will leave to their children, Duran said. Changing one of those variables will affect the others.

“Everything's interlinked,” Duran said. “It's kind of like a cockpit in a plane. If you move one lever, you're going to have to move other things to stay in line and get to where you want to go … Everyone's got to contemplate the trade-offs they're willing to make.”

Should I ‘Buy the Dip?’

One way to look at the market downturn is as a time to boost your retirement portfolio for the long run—you can buy stocks at a cheaper price now, knowing that their values will likely recover at some point, if history is any guide. 

“As long as someone's risk tolerance and time horizon aligns with potentials for further loss, I would absolutely say we are in a good ‘On Sale’ window to dollar-cost average additional cash into the market,” said Ashlea Jones, a financial advisor at Prime Capital Investment Advisors in Cedar Rapids, Iowa. ”We don't believe we are at the bottom but there is always opportunity for those who have the discipline and tenure to stick it out.”

Those “buying the dip” to boost their retirement savings, however, should be aware of the risks that go along with that strategy. 

“Are you really willing to increase your risk profile now?” Duran said. “And what if you're wrong, because it could be we're in the first year of a two-year decline like we had in 2007, 2008.”

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

“If you're young, this is a great opportunity to increase your equity,” Duran said. “If you're already retired, you're probably not thinking of increasing your equity exposure right now.”

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

Separate recent surveys from Goldman Sachs and Charles Schwab show that younger and older workers view their retirement prospects very differently. In the Goldman survey, workers in Generation Z (the youngest age cohort studied) anticipated retiring younger than their older counterparts did. Gen Z members surveyed were most likely to say they plan to retire around ages 60 to 64, and the least likely to say they plan to retire at any age after that. Gen X workers, on the other hand, were the oldest group to answer that question and the most likely to peg their retirement at age 65 to 69.

Gen Z was also more likely than other generations to say their retirement plans were on track or very ahead of schedule, and the least likely to say they were behind schedule.

In the Schwab survey, conducted in April, 94% of Generation Z said they were likely or very likely to meet their retirement goals.

Voris, of Schwab, said one possible reason for younger workers’ more optimistic assessments compared to their older counterparts is that older workers, being closer to retirement, have a much firmer idea of what their finances will look like. 

Another reason may be that younger people have a different idea of what “retirement” means.

“People don't really fully expect to retire, and more and more people talk about part-time work or even full-time work,” Voris said. “That influences the amount of money that you have to save for the amount of money that you'd be drawing from your retirement accounts each month or each quarter.”

Duran said younger workers’ views of their future finances may also have been shaped by the good job market of recent years, where jobs have been plentiful and workers are in high demand—a condition that won’t necessarily last forever

“A lot of these younger folks have been really spoiled by an economy that has been very aggressively courting anybody who will work,” Duran said. “They can't envision a situation in which the economy is tougher.”

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  2. Fidelity. “Fidelity Q2 2022 Retirement Analysis.”

  3. Northwestern Mutual. “The Difference Between Stocks and Bonds.”

  4. Vanguard. “Active Fixed Income Perspectives Q4 2022: Tenacity Through Turmoil.”

  5. Goldman Sachs. “Retirement Survey & Insights Report 2022.”

  6. Goldman Sachs. “Reinforcing Retirement Readiness.”

  7. Charles Schwab. “2022 401(k) Participant Study - Gen Z/Millennial Focus.” Page 8.

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