You’ve seen the news. The stock market’s in a slump as investors worry about inflation, rising interest rates, war, and global supply chain disruptions. The uncertain investing climate is taking a toll on your 401(k) balance, too — possibly casting doubt on your retirement plan and your financial future.
Doubt is a tough thing for retirement savers. It can push you to change course on your savings plan or even pause it temporarily. But before making any defensive moves in your 401(k), it’s smart to step back and evaluate how this downturn really affects you.
Yes, this downturn could upend your retirement plans. But then again, it may not. Fortunately, there’s one factor that can help you understand the risk you’re facing. And that factor is your retirement timeline. Read on to learn how to respond to this market downturn based on when you plan to retire.
You’re retiring in 20 years or more
In 20 years, this downturn should be a bad but mostly irrelevant memory. Here’s a data point that should help: Between 1950 and 2010, the S&P 500 has never lost value in a 20-year span.
History doesn’t guarantee the S&P 500 will be humming again when you retire. But it’s significant that the stock market has always rebounded from recessions, oil crises, political upset, stagflation, and burst 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. If anything, you might benefit from increasing your retirement contributions. That way, you’re buying more shares at lower prices — which puts you in a good place to benefit when the market returns to growth.
You’re retiring in 10 years
The history of the S&P 500 isn’t quite as solid over 10-year timeframes. Between 1950 and 2010, there have been seven 10-year losses in the large-cap index.
You do face some risk that this market will linger long enough to derail your retirement plan. The challenge is that big defensive moves today can be counterproductive. For example, you might kick yourself later if you sell your stock funds and the market recovers in 12 or 24 months.
A safer approach is to raise your retirement contributions instead. If buying more stock funds makes you nervous, use more conservative investment settings going forward. You could shift to a modestly higher percentage of fixed-income funds on those new contributions.
Your fixed-income positions won’t appreciate when the market recovers. But they should generate income reliably — income you can use for living expenses when you retire.
You’re retiring in five years or less
The S&P 500 has suffered 12 five-year losses between 1950 and 2010. With your five-year (or shorter) timeline, this downturn does put your retirement plan at risk.
There are a few moves you can make to address that risk:
- Increase your contributions and shift to a more conservative approach on new investments. Lean toward fixed-income funds or high-quality dividend funds, rather than growth funds.
- Save more in cash. This might feel counterintuitive, given inflation. But cash on hand can spare you from all kinds of problems. If the market’s still down when you retire, the cash can supplement your living expenses, for example. That allows you to minimize your liquidations in a down market.
- Don’t sell what you own today. Your stock funds are down in value. Selling them now would lock in those losses.
- Consider delaying your retirement. To be clear, a delay may not be necessary. But thinking through the possibility is useful. Maybe you’ll decide it’s not an option. In that case, you’d look at other contingency plans — like downsizing your lifestyle to adjust for a lower savings balance at retirement.
If you can’t decide, do nothing
This market cycle is in early stages. If dealing with contingency plans now feels overwhelming, it’s OK to do nothing. You might keep your distance from the financial headlines for now. Wait a few months, see where things are, and then walk through this analysis then.
As we learned in 2020, these rough markets can reverse themselves with surprising speed. If that happens again, you’ll be thrilled you didn’t make any drastic moves today.