NEW YORK, United States (AP) — Americans on the cusp of retiring are facing a tough choice as they watch their nest eggs shrink: Stay the course or keep working.
A stock market slump this year has taken a big bite out of investors’ portfolios, including retirement plans, like 401(k)s. The S&P 500, the benchmark for many index funds, is down about 17 per cent since its all-time high in early January.
The sharp reversal after a banner 2021 for Wall Street has been particularly unsettling for those who have been planning to retire sooner rather than later and banking on a healthier stock portfolio to help fund their post-work lifestyle.
It doesn’t help that the cost of everything from gasoline to food is up sharply amid the highest inflation since the 1970s. And that the Federal Reserve’s recipe for fighting inflation — hiking interest rates — has heightened fears the US economy will slide into a recession. All of that is bad news for corporate earnings growth, which is a key driver of stock prices.
The market skid has financial planners hearing more often from anxious clients seeking advice and reassurance in equal measure. They say some clients are opting to push back their retirement date in hopes that will buy time for their investments to bounce back. Meanwhile, retirees already tapping their investments may have to consider beefing up their savings with a part-time job or putting off major travel or spending plans.
“From late 2020 through 2021 we saw a wave of clients retire because of the large gains in the stock market and because they no longer wanted to work in the COVID ‘new normal’ work environment,” said Mark Rylance, a financial planner in Newport Beach, California.
This year, half the clients who discussed retirement opted to still retire, while the other half decided to hold off, he said.
Historically, the stock market has tended to deliver positive returns within a year following steep declines. But unlike younger investors who can ride out Wall Street’s sharp swings, workers closing in on retirement don’t have as much time to make up losses from hefty market downturns.
“I am a little afraid... I don’t want to work until I’m 70,” said Nancy Roberts, a librarian in Meridian, Idaho.
The 60-year-old is counting on her individual retirement account (IRA) to fund her retirement, which is a little over four years away. But the market decline has her feeling stressed.
“I do know I’ve lost money, but I’m trying not to freak out and look at it every day,” she said.
Many soon-to-be retirees are also terrified about inflation, which can be “devastating” over decades, said Mark Struthers, a financial adviser with Sona Wealth Advisers in St Paul, Minneapolis.
Social security has a built-in inflation adjustment, but it doesn’t keep up with real inflation, and pensions — which far fewer workers have these days — often max out the inflation adjustment at 1.5 per cent, he said.
“Compounding is magical when it is working for you, but devastating when it’s working against you,” Struthers said.
He advises retirees who are worried about getting by on their savings to be willing to cut back on spending on big-ticket items. That could mean taking a big vacation every other year, instead of annually, or waiting 10 years rather than seven to buy a new car. Struthers also strongly recommends that retirees work part-time.
When stocks are in a downward spiral, investors traditionally shift money into bonds, which are less risky than stocks. But bonds have not been a refuge from losses lately. High inflation has made bonds, and the fixed payments they make, less attractive. One index of high-quality US bonds has lost more than nine per cent so far this year.
Despite the market’s decline, investors, like Mark Bendell in Boca Raton, Florida, are sticking to their retirement timeline.
The engineer decided early in 2021 that he would retire before the end of this year. The 62-year-old reviewed his finances with a financial adviser and came away confident he would be able to live off his nest egg, which includes a 401(k) plan he’s been contributing to for about 34 years, a small pension, savings, and social security. His wife Laurie, a teacher, plans to retire next year.