When the stock market is down and your investments are too, it’s easy to wonder, “What is the stock market doing to my 401k?” The answer, however, is it’s helping it. Even if it isn’t right at this particular moment or next month’s moment, it’s very important to remember that, on balance, the stock market helps your 401k — a lot. If there’s one thing you should remember about the relationship between your retirement account and the stock market, that’s it. Why? Because at times — like the last few months, for instance — falling markets and doomsday headlines will prompt a lot of casual investors to fall into a cycle of repeatedly checking in on their balance and wondering why those dastardly stocks are ruining their dreams of living out their golden years on a beach in Bali. Or worse, it causes investors to move their money.
But this would be a clear example of “missing the forest for the trees.” Sure, there will be brief periods of time where the stock market will fall and your 401k will experience a painful loss of value. But those moments are when it’s most important to keep coming back to that same mantra: “The stock market helps my 401k.” Overreacting in those brief periods is one of the worst things you can do to your retirement plans in the long run.
Without the Stock Market, Your 401k Would Be in a Coma
Getting overly concerned about your 401k in falling markets is like getting really concerned about food because you have indigestion. Food might be causing you pain right at that moment, but if that leads you to conclude that food is bad for you, well, you probably have some much bigger issues than your 401k.
Without food, you will die. Seriously, just ask your doctor. And although dying would technically mean your indigestion would be gone, most people would probably agree that the occasional bout of heartburn is worth it for, you know, life. Pulling your money out of stocks wouldn’t exactly kill your 401k, but it would at least put it in a coma.
The S&P 500 has averaged a nearly 10 percent annual return over its history. Over the course of 30 years, a 10 percent interest rate would turn $10,000 into about $174,500. Not necessarily a beach in Bali but still pretty good. That same amount in a savings account earning 1 percent — which is easy to find but far higher than the 0.09 percent national average interest rate at present — would leave you with a little less than $13,500. A high-yield savings account earning you 2 percent interest takes you all the way up to a little over $18,000 over the same period of time. And if you stick to AAA-rated corporate bonds that have yielded about 4 percent in recent years? That would translate to around $32,400. Not bad, but less than a fifth of the returns for investing in stocks.
RELATED: Check out the 30 things you shouldn't off of until retirement:
30 Things You Shouldn’t Hold Off Until Retirement
30 Things You Shouldn’t Hold Off Until Retirement
1. Create a Post-Retirement Budget
How much you spend in retirement might differ dramatically from what you spent during your working years. That's why pre-retirees need to create a post-retirement budget, said Emily Guy Birken, personal finance expert and author of "Choose Your Retirement."
"To do this, you will need to determine your retirement income, including how much you expect to withdraw from your investments and what you expect to receive from Social Security or a pension," she said. "Going into retirement without a post-retirement budget is a good way to overspend in your early years."
Once you have a budget set, try living on your post-retirement budget for the year leading up to retirement, said Birken. Doing so "will help you acclimate to the changes" and "psychologically transition to your post-career life," she said. It'll also give you time to figure out if you're even ready for retirement or not so you can tweak your plan before the big day comes.
3. Avoid Lifestyle Inflation
The years leading up to retirement are when your income will likely be at its highest.
"Keep your budget the same in spite of salary raises," said Pauline Paquin, owner and founder of personal finance blog Reach Financial Independence. "That will boost your retirement nest egg and allow you to live on a fraction of your last income in retirement."
4. Reduce Living Expenses
"Start streamlining your lifestyle now in preparation for retirement," said Carla Dearing, founder and CEO of online financial planning service SUM180. "Take a close look at your monthly expenses and identify those items you can do without. This gradual approach will let you significantly cut your monthly expenses without feeling the shock of adjustment."
5. Check Your Savings Numbers
"Although this sounds like a no-brainer, it makes sense to double, triple and quadruple-check [your retirement numbers] before you abandon the safety net of a regular paycheck," said Robert Steen, enterprise advice director for retirement at USAA. "We recommend having roughly 10 to 12 times your final salary saved up before you start your retirement."
6. Identify Income Sources
Review and list guaranteed income sources — like Social Security, pensions and existing annuities — as well as income-generating investments such as IRAs, 401ks, taxable investment accounts and savings accounts, to get ready for retirement.
"If you have any doubts about your ability to cover any of your retirement expenses, or legacy goals, get some expert help," said Steen. "A financial advisor can provide additional perspective, advice and solutions to help you reach your retirement goals."
7. Plan Your Second Act
Some retirees pursue a passion project, while others seek a little extra income on the side to make ends meet. Dearing recommends using your last year of employment to plan for your post-retirement career.
"Build the skills, resources and professional network you'll need to earn additional income after you leave your current job," she said.
8. Coordinate Timing With Your Partner
"It is fun to think of retiring together and immediately embarking on your elaborate travel plans, but if you stagger your retirement, more of your retirement assets will stay invested," said Dearing. "You'll also have the continued benefits from one of your employers; the medical coverage alone might have a significant impact."
9. Boost Retirement Savings
"It can be difficult for many people to max out their retirement accounts throughout their working lives. But during your last year, strive to sock away as much as possible," said David Hryck, personal finance expert and partner with New York City tax law firm Reed Smith. Your last working year is the final opportunity to put away as much as possible and pad your retirement savings account.
10. Take Advantage of Catch-Up Provisions
"The government encourages saving in the final years leading up to retirement by allowing catch-up contributions to retirement accounts," said Daniel Zajac, partner with Simone Zajac Wealth Management Group. For people 50 years of age and older, the IRS allows a pre-tax deferral of $24,500 into an employer-sponsored retirement plan.
IRA participants age 50 and older who meet income requirements can also contribute an extra $1,000 per year. "I've never heard a retiree complain that they saved too much for retirement," Zajac said.
11. Consolidate Financial Accounts
It's easier to keep track of your investment income if your accounts are in as few places as possible. Hryck suggests consolidating financial accounts to simplify record-keeping and achieve easier cash flow tracking as you get ready for retirement.
However, he warns individuals to "consider the consequences from a tax perspective prior to making any moves, such as selling stocks or mutual funds."
12. Reduce Your Portfolio’s Risk Profile
"The worst time to take a negative in your portfolio is right before retirement," said Tom Till, financial professional and owner of APPS Financial Group, which helps families and individuals with financial planning. "It will directly affect how much you can live on during retirement."
Contact a financial planner or take an online survey to determine your risk tolerance and adjust your portfolio accordingly. "I have seen people have to work an extra two to four years because they failed to take this step when close to retirement," Till said.
13. Create a Distribution Strategy
The accumulation and distribution of assets require two entirely different strategies and, particularly for those with a long retirement horizon, there will likely be a need for simultaneous accumulation and distribution plans.
"It is key to work with someone who is knowledgeable about distribution in this phase of life," said Till. Distribute too much or earn too little, and you risk not having enough capital to make it through retirement.
"Credit card debt can carry an interest rate of up to 20 percent," said Till. "Student loan debt never goes away, and the government can choose to withhold your Social Security benefits if you have outstanding student loans."
15. Relocate for Retirement
If you're planning to retire elsewhere, Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group in Scarsdale, N.Y., suggests moving or buying a second home while still employed.
"While many retirees can qualify for a mortgage, it's much easier to prove you have the income to support a mortgage if you make the move while still earning a full salary," he said.
16. Work Extra Hours
"Some pensions and severance payments are calculated based on the income you earn in your last few working years before retirement," said Sullivan. "Therefore, working additional hours or taking on additional projects in your final working years can give you extra income now and in the future."
In other words, a little extra hard work now can create a substantial payoff once you transition out of the workforce.
"Lack of adequate insurance coverage can lead to high unexpected costs that might cause you to go into debt," said Harrine Freeman, financial expert and CEO of H.E. Freeman Enterprises. The majority of bankruptcies result from an unexpected, expensive medical concern. Long-term care insurance can help defray the high costs associated with an unforeseen ailment or potentially needing long-term care.
18. Refinance or Pay Off Your Mortgage
"The thing you absolutely must do is straighten out your mortgage financing before retiring because you might not qualify with your reduced income after retirement," said Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage." "If you don't do this, you might find yourself with too high an interest rate that you can't get rid of, too high a payment for your new, lower income or plenty of equity but no way to access it readily."
19. Declutter Your House and Mind
"Clearing our mental clutter is an essential step to getting ready for the next chapter in our lives, which often includes getting rid of stuff," said Catherine Allen, co-author of "The Retirement Boom: An All-Inclusive Guide to Money, Life and Health in Your Next Chapter."
Not only are these items unlikely to be worth as much as you think, but the odds are also good that your family members won't hang on to them.
"Our kids and grandkids are minimalists and don't want to save Aunt Hattie's china or Grandpa Paul's stamp collection," she said.
20. Know How Your Income Affects Your Taxes
"When an individual's 'combined income' — defined as half your Social Security benefit, plus your other adjusted gross income — exceeds $25,000 as a single person, your benefit becomes taxable," said personal finance writer JoeTaxpayer. "Simply put, the tax burden on $30,000 of Social Security benefits and $20,000 from retirement funds will be far less than if the two were reversed."
"For each year you delay benefits past age 62, you gain a 6 percent to 8 percent increase in lifetime annual benefits. That adds up quickly," Steen said. You can check your personal Social Security benefits at SSA.gov.
22. Engage in Your Interests and Hobbies
Many pre-retirees forget to account for how they'll spend their time once they're no longer headed to the office each day. "Chart out your time both at the macro-level (annual vacations, trips, etc.) and at the daily level — what will you do immediately after waking up?" said Paula Pant, personal finance blogger and founder of Afford Anything.
If you fail to plan ahead for retirement hobbies, "you'll develop restlessness, spend too much money out of boredom and potentially jump back into the workforce due to a lack of anything else to do," she said.
23. Apply for a Reduced Real Property Tax Program
"Many of the elderly lose their homes due to the inability to pay their real property taxes and in some cases, the amount owed is less than $1,000," said Freeman. "Owing taxes during retirement will reduce your monthly cash flow and might put you in a financial bind that could take months to recover from."
"Home repairs can range from hundreds to thousands of dollars per repair, and might lead to usage of credit cards if you cannot afford to pay for the repairs on your fixed income," said Freeman. An up-to-date home warranty can cover many unexpected repair costs, which can help keep a retiree from busting the budget.
25. Build an Ultra-Emergency Savings Account
"The standard advice for emergency savings accounts is to have six to 12 months' worth of living expenses. However, if you plan to no longer have earned income, increase your emergency savings to 18 to 24 months' worth," said David Auten and John Schneider of The Debt Free Guys blog.
"For the 12 months leading into retirement, cut your expenses and put all additional savings into your ultra-emergency savings account," they added. That way, it can help keep invested assets secure, if and when an unexpected financial emergency occurs.
26. Review Family Financial Obligations
An emotional drive to help loved ones financially can erode a nest egg.
"Helping out family and friends is great, but don't do it at the expense of your retirement savings," said Steen. "Outliving your resources is a real risk. So, even if you think you have the cash available, seek professional advice before making a decision."
27. Review Life Insurance Coverage
When you retire, you might lose the group life insurance coverage offered through your employer.
If you "still have financial obligations such as dependent children, a mortgage or a car loan, consider buying a private life insurance policy if you're entering retirement with debt, or if you would lose benefits if you or your partner dies," said Steen.
28. Consider Healthcare Coverage
"Knowing exactly what to expect from your healthcare benefits is vital for retirees," said Birken. Fidelity has calculated that a 65-year-old retiring couple will need $275,000 for healthcare over the span of their retirement.
The first step she recommends is a meeting with your human resources department to find out if you're one of the lucky few who will receive employer-covered healthcare during retirement. If not, find out when your health benefits will lapse in retirement and, if you're under age 65 when you retire, you'll need to do to sign up for COBRA.
29. Get Organized
Organization doesn't just make your life easier in retirement; it also ensures loved ones can easily find key documents in case of an emergency and if you're unable to access them yourself.
"Compile critical information in a safe place, such as a fire safe," said Allen. "Keep paper copies of important documents, in case you lose the electronic."
You should also make a list of all your online accounts and passwords, such as your bank and investment accounts, so your family can easily find this information when the time comes.
30. Check Your Emotional Readiness
"Just because 'everyone' retires at age 65 doesn't mean you have to do the same," said Steen. Before leaving your career, ask yourself if you're retiring because it's something you look forward to or because it's something you expected to do at a particular age milestone.
If you're constantly asking yourself, "Am I ready to retire?" and never pulling the trigger, you might want to hold off on quitting your day job.
"If you are very unsure of the decision to retire, and have a choice, then don't do it," said Steen. "Working longer, perhaps at something new and different, can help you maintain yourself, both financially and mentally."
When Stocks Fall, They Usually Bounce Back Quickly
Granted, the above example isn’t entirely fair. That 10 percent a year is not a consistent, year-in-year-out sort of thing. If the market plunges 30 percent halfway through year 30 — as it has been known to do — it changes that overall return considerably. But overreacting to those dips is a big mistake, no matter what the headlines are blaring at you about crashing markets.
Here’s a fun exercise to help you weather the storm when you’re feeling anxious about your 401k: Any time you see an article about how markets are in turmoil, note the date. Then, keep checking back in on the market every day after that and note just how long it takes until the Dow Jones Industrial Average or S&P 500 gets back to where it was prior to the dip. More often than not, things will be back where they started inside of a couple of weeks, maybe a month.
What you’ll also start to notice is that part of your concern is just a function of the way the news media covers stocks. A one-day drop of 300 points from the Dow is a gripping, click-worthy headline. The Dow gaining back those 300 points a little bit at a time over the next week and a half is not. But, in terms of your 401k, the gradual, not-newsworthy recovery is equally as important as the dramatic one-day drop.
Even when you’re talking about something larger than a single-day hiccup — say the massive drop in 2008 caused by the housing crash — the recovery time is still much shorter than you might assume. If you had all your money in an S&P 500 fund when the housing crash hit, you would have recovered all of your losses within six years. And if you kept holding on, you would have been up 25 percent after about seven years. Not too shabby for the biggest financial disaster since the Great Depression. And that situation was significantly worse than usual. A market correction — which is defined as a drop of 10 percent or more — lasts about four months on average and takes about the same length of time to recover, while a bear market — a drop of 20 percent or more — lasts a little over a year and takes about two years to recover, on average.
Asset Allocation Can Protect You as You Approach Retirement
Now, there is one rather important caveat to this: people who are nearing or just entering retirement. If your plans called for 2018 to be your last year in the workforce, that dip at the end of last year was more than just a hiccup — it could mean your portfolio is seriously hampered right when you need it the most. And if you were planning to retire midway through 2008? Well, that roughly six-year wait until your 401k recovered was a lot bigger than a minor inconvenience.
That’s why one of the general rules of thumb you hear about investing is to gradually shift your money from stocks, with all of their ups and downs, to bonds, which, if you hold them until maturity, provide a very stable and predictable — if smaller — return. And, as you approach retirement, that stability becomes more important than just getting the most out of your 401k because you can no longer just wait out market downturns until they bounce back.
But you shouldn’t have too much trouble getting help with rebalancing your portfolio as you age. Not only will any financial advisor worth their salt know how to handle this in their sleep, but most 401k companies or brokerages will offer primers on how to approach this and help you along the way. Even if you don’t have someone helping you, there are plenty of sites that will provide calculators to help you determine the right mix for your age.
And if all else fails, the age-old rule of thumb is that the percentage of your portfolio that’s in stocks should be about 100 minus your age, so 40 percent for a 60-year-old, 30 percent for a 70-year-old and so on. It’s not necessarily an ideal approach for everyone, but it’s still a simple formula that’s easy to follow.
Take a Deep Breath and Remember: ‘The Stock Market Helps My 401k’
So, before you start to worry about what’s happening to your 401k, take a deep breath and remember that the stock market is what fuels your retirement account. Any money that you’re “losing” from your retirement funds likely wouldn’t exist in the first place without that same stock market. Even if it might look pretty grim at times, the long-term view of the stock market has been remarkably consistent once you smooth out the spikes and plunges along the way.
Stocks, like food, aren’t going to work out perfectly 100 percent of the time. There’s going to be that afternoon at the county fair where the combination of chili dogs, funnel cake and deep-fried Oreos leaves you wishing you didn’t have a mouth. But you just can’t get by without food. After all, even heartburn can’t ruin a beach in Bali.