During times of uncertainty, we often turn to the experts for guidance in areas of concern, like finances, health, and livelihood. Katie Couric’s Wake-Up Call newsletter (subscribe here) has been seeking out clear and concise answers to pressing questions on such topics from some of our Ally experts.
Recently, Lindsey Bell, Chief Investment Strategist with Ally Invest, spoke with Wake-Up Call to explain what’s been going on with retirement accounts and the stock market. Read on for helpful information and useful advice — but as a disclaimer, make sure to consult with professionals for questions specific to your own financial situation.
Katie Couric’s Wake-Up Call: Many of us have seen significant dips (and subsequent rises) in our retirement accounts. What exactly is going on? Why are these losses — and gains —happening at this time?
Lindsey Bell: Swings up and down like what you described are called “volatility” in the stock market. It can be unnerving because it is a sign of uncertainty about the future. The rise of the coronavirus around the globe, and especially in the U.S. in late February, increased the level of uncertainty about future growth domestically. Stocks have a harder time performing well when the future is uncertain, which can lead to a decline in the broader market as well as in personal investments, like retirement accounts.
More recently, news that the virus may be peaking and signs that the curve is starting to flatten in the U.S. have helped investors regain optimism that the decline in growth may be ending and the economy can re-open again soon. This, along with extraordinary actions taken by the government and Federal Reserve Board to aid small businesses and individuals during this crisis, have helped to boost markets. Volatility may continue as the path back to normal is chartered.
A big question many people have been asking: What should we do about this? Should people take action and perhaps change their investments or withdraw from their accounts? Or is it better to do nothing?
One option is to consult a professional who is familiar with your specific situation to help assess your specific needs. Another option may be to do nothing during volatile markets like this. Times like these remind us that we have an investing plan for a reason — to be our guiding light during periods of uncertainty. If you have a long time (20 or 30 years) until retirement, staying the course may be an option given that markets have recovered during other times in recent history. Try not to get in your own way when it comes to your retirement accounts.
Should certain people (i.e. those nearing retirement) be more concerned about this dip than those who are still years — or decades — away?
This is a tough question to answer. There are a few variables that people nearing or in retirement may want to consider before making changes to their investments, including: their retirement spending plans, when they plan to retire (do you have flexibility?), their current asset allocation (stocks vs. bonds vs. cash), and other sources of income that will be available during retirement (Social Security). If it looks like you may struggle to reach your retirement goals at this time and you haven’t had a chance to begin to de-risk your portfolio, it may make sense to maintain a position in stocks to benefit from the growth that could come after the market bottoms (some of the best days in the market have historically occurred after the bottom). Remember to consult a professional who is familiar with your specific situation to help you plan your transition into retirement.
When should we expect our retirement accounts to get back to the levels they were prior to this pandemic?
Getting back to even takes time. CFRA historical data shows that the S&P 500 index has returned to its previous highs ~27 months after bottoming. This is a long timeframe, but there may be a glimmer of hope in the fact that when the index bottoms more quickly, it has often rebounded more quickly. The bear markets of 1962, 1966 and 1987 took 13 months to recover on average, about half the length of recovery for all bear markets. Those three bear markets bottomed in six months. If March 23 was the market bottom (and we aren’t sure that it was), that would make it the fastest bear market in history!
And just generally speaking — how much should people aim to have saved in their retirement accounts before they retire?
There are several different rules of thumb for this. My personal favorite suggests having 9 to 10 times more than your final salary saved up for retirement. But don’t fret — if you feel like you’re a little behind on saving, you aren’t alone. Times like these make it difficult to make saving for retirement a priority, but if you focus on the things you can control — like reigning in your expenses or downsizing your living arrangements — it could help better prepare you for retirement in the future.
Thank you so much for clearing this up for us. Any last thoughts?
I want to highlight some retirement benefits included in the CARES Act recently passed by Congress that can help people financially. First, if you are experiencing financial hardship related to the coronavirus pandemic, you can now withdraw funds from your 401k or IRA account without being charged the normal 10% early distribution fee. One thing to keep in mind is that you will be required to repay the money, plus taxes, over the required three-year repayment period (it’s normally a 60-day period). Second, the deadline for contributing to your 401k and IRA has been extended to July 15. If you have some extra cash, you could take advantage of the extension.