Market Volatility and Your Retirement Plan

As market volatility continues, we understand that you may have feelings of uncertainty. These emotions are perfectly normal. Seeing your investment accounts decline in value can be unnerving, even to the most experienced investor. During these difficult periods, it’s critical to maintain perspective and focus on the actual long‐term timeline. Depending on where you are in your savings career, there are things you can do today (emotions aside) to improve your chances of achieving your retirement savings goals.

Let’s begin by fully acknowledging that 2022 has been a difficult year for investors. Investors have seen losses in their equity and stock holdings, but the true exacerbator of this particular sell‐off has been the losses sustained in fixed income/bonds. The dramatic rise in interest rates over such a short period of time has led to some of the worst conditions for investment grade corporate and government bonds. In other words, the portion of your portfolio that usually serves as the ballast during stock market declines has actually been the epicenter for losses in the first half of the year. It’s not unusual to see stocks decline double digits – this happens quite frequently – but double‐digit losses in investment grade bonds is very unusual.

Over the last 20 years, there have been several periods where investors have experienced noticeable losses: 2000, 2008/2009, and 2020, just to name a few. Retirement plan investors should keep in mind that after each of these volatile periods, markets eventually recovered and appreciated to new highs. It’s never fun when we are living through a tough investment environment, but from a historical perspective the markets eventually recover and move on.

Over the past few market corrections, the amount of time investors had to wait to see a recovery has been relatively short. The rapid fall in market prices has been met with an equally strong recovery over just a few weeks or months. A big reason these impressive recoveries occurred was due to the Federal Reserve (the Fed). Since early 2009, the Fed has been very accommodating to the economy. It slashed interest rates and even implemented an unprecedented bond buying program referred to as Quantitative Easing. This was done to kick‐start the economy and improve investment market conditions.

In 2022 we find ourselves in yet another market correction. This time, the Federal Reserve is taking a less accommodative stance. Having lowered rates to historically low levels, the Fed is now raising interest rates and unwinding its bond purchasing programs. This is being done to slow the economy and reduce the inflationary pressures we are all experiencing at the grocery store and gas pumps.

Why do we mention this? Two reasons: 1.) As we’ve said before, the markets will recover at some points, and 2.) The recovery period might be longer this time due to the Fed’s actions in fighting inflation. Because of this, it will be unsurprising if this correction tries the patience of investors.

Subscribing to the tenant that markets will recover at some point, here are five general things retirement plan investors can do during this market correction:

      1. Don’t overreact: It is only natural to feel overwhelmed when markets are volatile but strive to remain disciplined during these times. Stick to your plan when it comes to saving, investing, and preparing for your future. Continuing to make contributions when markets are under pressure can have powerful long‐term effects, especially for younger investors.
      2. Keep your true time horizon in mind: It’s convenient to be able to review your quarterly statements or check your account balances online. The downside is that it can lead investors to adopt a short‐term mentality as it relates to their portfolio allocations. Many investors will not need to start living off their retirement plan assets for decades. Be sure to adopt and maintain a contributions schedule and a portfolio allocation that will set you up for success in the long run.
      3. Increase your contributions: We fully acknowledge that this is easier said than done. That said, just a modest increase to your deferrals, especially when markets are down, can have a positive impact on your long‐term outcomes. If you can’t afford to increase your contributions, focus on maintaining your current deferral rates.
      4. Review your asset allocation: Does your investment mix still fit your long‐term risk tolerance? Log in to your participant account and review your asset allocation if you haven’t done this recently. Make sure you have broad diversification that is appropriate for your time horizon and financial goals.
      5. Ask for help: There are resources available to you. The best place to start is by contacting your recordkeeper, which is the company where your participant account is located.

As your time horizon changes, so too will your investment objectives. Listed below are some key considerations for different career milestones.

Early‐career investors (15 years or more until retirement)

  • You are dollar cost averaging into your retirement account every time you contribute. When the markets pull back, you are buying at lower prices that can prove quite valuable years down the road.
  • Lean on a diversified portfolio approach, based on risk tolerance and time horizon for financial goals.
  • Consider increasing your contribution amount.
  • Build, or use, your emergency fund to avoid costly withdrawals from your retirement account.
  • Establish a household budget.
  • Review your beneficiaries.

Mid‐career investors (5 – 15 years until retirement)

  • Make sure your investment mix (allocation) is appropriate for the years remaining until retirement.
  • If you’re 50, or turning 50 this year, remember that you are eligible to make additional catch‐up contributions to your account.
  • Refine your household budget. Start formulating your retirement budget. What will your expense look like once you stop working?
  • This may be a good time to evaluate if Roth conversions might make sense for your situation (if available in your plan).
  • Review your beneficiaries.

Late‐career investors (less than 5 years until retirement)

  • Your allocation should be more balanced, likely still favoring stocks, but with a larger allocation of bonds and stable value (defensive, short term) assets.
  • Do you have at least a year or two worth of your retirement spending needs in fixed income investments? This would allow an investor even more time to allow the stock/equity portion of their portfolio to recover.
  • Catch up contributions should be in place to maximize your account growth opportunities.
  • Test your budget. Are you able to stick to it in these turbulent times?
  • Have you developed a financial plan for retirement? Be sure your Will and Medical Power of
    Attorneys are current. It may be time to consider a professional’s help.
  • Review your beneficiaries.

This is not an exhaustive list of guidance. Considerations should be personalized for your individual situation. This is educational in nature and should not be construed as financial, legal nor tax advice.