Forbes - May 5, 2020
“Retirement accounts have been decimated by the recent stock market crash.”
I heard this statement recently from a professional who really should know better. While the recent stock market volatility is indeed disturbing, the reality of the situation for most workers and retirees is that there’s no need to panic. Let’s see why by looking at the retirement resources available to most workers, even considering the recent downturn. Your 401(k) or IRA savings are still most likely ahead of recent levels
Yes, the stock market is down in 2020: The year-to-date results as of April 30, 2020 show the S&P 500 has dropped about 9.2%, reflecting returns from dividends.
While such a loss is definitely bad news, let’s put it into perspective: In 2019, the S&P 500 gained 31.5%! As a result, if you’ve been significantly invested in stocks since the beginning of 2019, it’s likely that your stock investments are still ahead compared to bonds or other “safer” investments.
In fact, let’s look at an even longer investing horizon. Suppose you invested $10,000 in the Vanguard Balanced Index Fund on April 30, 2010. How much would your retirement savings be worth now, in spite of the recent downturn?
In this example, there’s a slight downturn in the level of retirement savings in 2020, following nearly a decade of stock market gains. As of April 30, that $10,000 in retirement savings is at a level last seen in mid to late 2019—hardly a game-changing setback. And the original $10,000 investment has more than doubled in 10 years, even reflecting the latest downturn.
A quick note: This example assumes your savings is invested in the Vanguard Balanced Index fund, which is approximately 60 percent invested in stocks and 40% in bonds. But the results would still be similar for people who might have had a different allocation to stocks, or who added more contributions after 2010.
Don’t forget: Social Security benefits provide substantial risk-protected income
For most middle-income workers and retirees—those with less than $1 million in savings—Social Security will provide a substantial portion of their overall retirement income, typically at least two-thirds but even as much as 90% or more.
This situation provides you with substantial protection from stock market crashes, since Social Security benefits don’t go down in value when the stock market does. So your Social Security income—a very large part of your total retirement income—is still intact and is risk-protected. Any volatility in the retirement income generated by your savings will occur in a relatively small portion of your total retirement income.
You can’t guess at what lies ahead
You may have read headlines warning of a coming depression…no, wait, high inflation…no, wait, a V-shaped recovery. Or maybe a W-shaped recovery. Or perhaps even an L-shaped recovery.
The fact is, nobody really knows what will happen in the next few months or years, not even the experts. But we still need to make saving and investing decisions.
With that in mind, no matter what happens, it still makes sense for workers to continue saving and investing for retirement if they can, given their employment situation . Having “ money in the bank” is much better than not having money in the bank.
Of course, many unfortunate workers have been furloughed or laid off, and they may need to suspend making retirement contributions. This is entirely understandable. If this is you and you’re considering making hardship withdrawals from your retirement savings to make ends meet, consider this step to be an absolute last resort to avoid bankruptcy or eviction.
For pre-retirees and retirees, it still makes sense to spend time developing a thoughtful financial strategy that will protect you against current and future downturns that are inevitable with a long retirement. You’ll feel better and more secure with solid plans in place.
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