The Stock Market Is Down 14% This Year: What It Means For Your 401(k)


YesYou have seen the news. The stock market plummets as investors worry about inflation, rising interest rates, war and global supply chain disruptions. The uncertain investment climate is also weighing on your 401(k) balance — perhaps casting doubt on your retirement plan and financial future.

Doubt is a difficult thing for retirement savers. This may cause you to change course on your savings plan or even suspend it temporarily. But before you take defensive action in your 401(k), it’s a good idea to take a step back and assess how this downturn is really affecting you.

Yes, this slowdown could upset your retirement plans. But again, that may not be the case. Fortunately, there is a factor that can help you understand the risk you face. And that factor is your retirement schedule. Read on to find out how to react to this market downturn based on when you plan to retire.

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You retire in 20 years or more

In 20 years, this slowdown should be a bad memory but above all without interest. Here is a data point that should help you: between 1950 and 2010, the S&P500 has never lost value in a period of 20 years.

History does not guarantee that the S&P 500 will buzz again when you retire. But it’s significant that the stock market has consistently rebounded from recessions, oil crises, political upheaval, stagflation and bursting bubbles – in 20 years or less.

If your retirement timeline is measured in decades, this downturn may ultimately mean nothing to your 401(k). A defensive change to your strategy now would be premature. On the contrary, you could benefit from an increase in your pension contributions. This way you buy more stocks at lower prices, putting you in a good position to take advantage of the market’s return to growth.

You are retiring in 10 years

The history of the S&P 500 is not as strong over 10-year periods. Between 1950 and 2010, there were seven 10-year losses in the large cap index.

You face some risk that this market will persist long enough to derail your retirement plan. The challenge is that today’s big defensive moves can be counterproductive. For example, you could kick yourself later if you sell your equity funds and the market recovers in 12 or 24 months.

A safer approach is to increase your pension contributions instead. If buying more stock funds makes you nervous, use more conservative investment settings going forward. You could switch to a slightly higher percentage of fixed income funds on these new contributions.

Your fixed income positions will not appreciate when the market recovers. But they should reliably generate income – income you can use for living expenses when you retire.

You retire in five years or less

The S&P 500 suffered 12 five-year losses between 1950 and 2010. With your five-year (or shorter) timeline, this downturn puts your retirement plan at risk.

You can take a few steps to deal with this risk:

  • Increase your contributions and move to a more conservative approach to new investments. Prefer fixed income funds or high quality dividend funds over growth funds.
  • Save more cash. This may seem counter-intuitive, given inflation. But cash can save you all sorts of trouble. If the market is still down when you retire, the money can supplement your living expenses, for example. This allows you to minimize your liquidations in a bear market.
  • don’t sell what you have today. Your equity funds have lost value. Selling them now would lock in those losses.
  • Consider delaying your retirement. To be clear, a delay may not be necessary. But thinking about this possibility is useful. Maybe you’ll decide that’s not an option. In this case, you would consider other contingency plans, such as downsizing your lifestyle to adjust to a lower savings balance in retirement.

If you can’t decide, don’t do anything

This market cycle is in its early stages. If managing contingency plans now seems overwhelming, there’s nothing wrong with doing nothing. You could keep your distance from the financial headlines for now. Wait a few months, see where things stand, then go through this review.

As we learned in 2020, these raw markets can reverse with surprising speed. If it happens again, you’ll be glad you didn’t make any drastic moves today.

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