As we navigate the financial landscape, retirement savings have become a critical concern for many Americans. The recent market volatility has left investors questioning the stability of their 401(k) accounts. Will they be able to retire comfortably? While younger investors have shown resilience and made significant strides in recovering from the market turmoil of 2022, older investors have faced unique challenges. In this article, we will explore insights from reputable sources including Bankrate, Fidelity Investments, Guggenheim, and Vanguard to better understand the current state of retirement savings and provide guidance for weathering the storm.
The Impact of 401(k) Losses on Retirement Savings
The year 2022 proved challenging for retirement savers, as average 401(k) balances plummeted. Fidelity Investments’ report revealed a 23% decrease in average 401(k) balances to $103,900, while individual retirement account (IRA) average balances sank 20% to $104,000.(Fidelity, 2023) Similarly, Vanguard’s analysis indicated a 20% decline in average 401(k) balances to $112,572. (Vanguard Institutional, 2023) These figures highlight the widespread impact of market volatility on retirement savings.
Bouncing Back from 401(k) Losses
Now, let’s discuss how to recover from 401(k) losses. This depends on your age and retirement savings. I would recommend (rather than advise) that you don’t buy into the philosophy that the market always goes up. While the market may have always recovered over the past century, you don’t have a century to wait for a recovery. If you’re nearing retirement, it’s crucial to monitor account volatility. The closer you get to retirement, it may be wise to adjust your investment strategy to prioritize generating income over accumulating wealth. A recent Guggenheim report shows that “investment strategies that work in bull markets may not be effective in flat or bear markets.” (Guggenheim investments, 2022)
Review Your Investment Allocation
It is important to review your investment allocation a few times a year, regardless of your age and level of investment activity. Assess whether your current allocation aligns with your risk tolerance and investment time horizon. If needed, consult with a financial advisor to calculate your risk tolerance and make adjustments accordingly. Ensure your investments still align with your objectives. Over the years, the investment options may change more than you do. Companies often change their objectives, merge with other entities, or reallocate resources. Either of these changes may not always align with your personal preferences.
Increase Your 401(k) Contribution Percentage
Consider increasing your 401(k) contribution percentage this year. Currently, the average contribution rate sits at 13.7%, slightly below Fidelity’s suggested savings rate of 15%. By contributing more during market dips, you can take advantage of lower prices and potentially accumulate more shares in quality investments over the long term. (Fidelity, 2023)
Keep this in mind:
“Your savings rate is more important than your rate of return.”van richards, chfc
It’s important to understand that having a high savings rate enables you to build your wealth gradually and consistently. In contrast, relying solely on a high rate of return can be a risky strategy as it depends on market performance, which is often unpredictable. Therefore, it’s crucial to prioritize saving regularly and consistently to ensure financial stability over the long term.
Be Mindful of Sector Concentration
Avoid relying too heavily on specific sectors. Build a diversified retirement savings portfolio that is appropriate for your risk tolerance. Allocation preferences vary for each person, and it’s important to keep in mind that the more you have invested in stocks, the more volatile your account will be. While bonds tend to be less volatile, they are not entirely risk-free. Therefore, it is essential not to overlook fixed or guaranteed investments, especially now that interest rates are high.
It’s important to note that concentration in certain securities can change over time due to internal changes in the investment options. For example, if you choose to invest with a 60/40 strategy ten years ago, today it would be more like an 85/15 allocation of stocks to bonds. Assuming that stocks are more volatile than bonds, the portfolio would be much more sensitive to market changes. If that is your intention, that is OK. But if you are retiring and you want a more conservative allocation. you should be aware of the change.
Another type of sector concentration can unintentionally occur with target date funds. In general, a target date fund may have a conservative name, but its allocation can be much more aggressive than its name implies. Some target date fund manager will also increase their risk by increasing the allocation of risky assets. Because of the structure of CITs, they can also be susceptible to the same type of sector concentration. So, it is a best personal financial practice to do regularly review the investment allocation of your retirement accounts, even if you do nothing.
The Retirement Savings Landscape in 2023
The Need for Higher Retirement Savings
Bankrate’s poll reveals that nearly one in three U.S. adults estimate they would need more than $1 million to retire comfortably. However, 45% of workers believe it is unlikely they will be able to save enough to reach this goal. This lack of confidence highlights the pressing need for higher retirement savings. (Gillespie, 2023)
The Perception of Falling Behind
More than half of American workers feel they are behind in their retirement savings. Bankrate’s survey indicates that 56% of workers believe they are not where they should be with their retirement savings. This sentiment has remained relatively unchanged since 2022. Gen Xers, in particular, express a sense of urgency, with 69% feeling behind in saving for retirement. (Gillespie, 2023)
Challenges for Baby Boomers
While younger investors have shown resilience, baby boomers face unique challenges. The average 401(k) account balance for boomers remains underwater, standing at $220,900 at the end of June 2023, compared to $249,700 in 2021. The decline in both stock and bond values in 2022 has impacted the retirement savings of this generation. (Fidelity, 2023)
The Road to Recovery from 401(k) Losses
Younger Investors Make a Comeback
Millennials have made significant strides in recovering from the market turmoil of 2022. By mid-2023, the average millennial had made up all of their losses, with the average 401(k) balance reaching $48,300. Gen X retirement accounts stand at $153,300, down 8% since the end of 2021, while Generation Z has seen a 53% increase to $8,100. (Fidelity, 2023)
Professional Advice for Retirement Savings
As retirement balances continue to fluctuate, it is crucial for those with diminished funds to seek guidance from a financial planner. However, baby boomers have shown a reluctance to work with financial advisors, often relying on their own management strategies or advice from family and friends. Seeking professional advice can provide invaluable insights and help navigate the complexities of retirement planning. When it comes to retirement planning, my own professional experience has taught me that many people don’t know what they don’t know. If you need help with your retirement account, feel free to reach out to me.
The Role of Bonds in Retirement Savings
Despite the challenges faced by older investors, rising interest rates offer potential long-term gains for bond investors. While bond values suffered in 2022, new bonds are expected to offer higher interest rates. Bonds continue to serve as a stable component of a diversified portfolio, providing stability during market downturns. Plus, consider the benefit of annuities. Annuities now offer guaranteed income with higher rates, providing security.
Be Calm and Save On
The volatility of the market in 2022 and 2023 has had a significant impact on retirement savings, with average 401(k) balances decreasing across the board. However, it is important to approach the situation with a long-term perspective. By reviewing and rebalancing investment portfolios, increasing contribution percentages, and seeking professional advice, investors can navigate the challenges and work towards building a secure retirement. While older investors face unique hurdles, bonds and annuities offer the potential for long-term gains. By staying informed and proactive, individuals can weather the storm and secure a comfortable retirement.
Remember, the journey to retirement is not a straight line, and setbacks are a part of the process. By remaining disciplined, adaptable, and well-informed, you can work towards achieving your retirement goals.
Fidelity. (2023, February 23). Fidelity® 2022 retirement analysis: In the midst of inflation and uncertainty, retirement account balances are rising. The NewsMarket. https://newsroom.fidelity.com/pressreleases/fidelity–2022-retirement-analysis–in-the-midst-of-inflation-and-uncertainty–retirement-account-ba/s/095bb4a8-cf3a-484e-a911-bc0c61c460ff
Gillespie, L. (2023, September 27). Survey: 56% of Americans feel behind on saving for retirement. Bankrate. https://www.bankrate.com/retirement/retirement-savings-survey/
Guggenheim investments. (2022, December 31). Dow Jones historical trends. Retrieved October 14, 2023, from https://www.guggenheiminvestments.com/advisor-resources/interactive-tools/dow-jones-historical-trends
Vanguard Institutional. (2023, June). How America saves 2023. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf