Talk about a worst-case scenario for investors' retirement savings. Inflation is eating away at buying power. At the same time, stocks are struggling.
Such a one-two punch hits 401(k)s and IRAs hard. Along with the 40-year high in inflation, a bear market pounded Americans broadly. Domestic stocks, bonds and overseas markets were all down double digits in 2022.
The strain is taking its toll on anyone hoping to retire. In November, a Wells Fargo study found two in three investors are financial "doomscrolling," or constantly checking their investments on their phones when the market is falling.
"We've had an unusual convergence where there's been almost nowhere for investors to hide," said Christine Benz, Morningstar's director of personal finance.
How do you keep your retirement on track when such powerful forces are pulling against you?
Don't Give Up On The Stock Market
With stocks falling, it's tempting to give up on the stock market for retirement savings. Don't. Keeping your long-term retirement savings invested is one of the only ways to keep up with inflation.
Just hanging onto a fund invested in the S&P 500 returned 9.9% annually on average since 1928, says Index Fund Advisors. That average return outpaces average long-term inflation by more than 200%.
Additionally, for long-term retirement money, today's depressed stock prices are actually a blessing. They allow you to buy more shares than you could have in 2021 for the same investment amount.
"Buying now and saving for the long term is one of the best things you can do to get back on track," said L. Kelly LaVigne, a retirement expert at Allianz Life Insurance Company.
Avoid Timing Your Retirement Money
Savvy investors know what to look for when investing in individual stocks. But with long-term retirement savings money, it's often best to avoid trying to time your contributions. You'll likely get the timing wrong.
If you stop contributing to your retirement savings accounts, it's tough to know when to resume. So, many people don't resume.
"What we see, time and time again, is those investors don't come back," said Nathan Voris, head of investments and insight at Charles Schwab. "They make that change and then it slips off the radar. Life happens."
Getting hung up on perfectly timing the market doesn't matter much with long-term retirement savings. Schwab found that an investor who simply invested $2,000 annually at the start of the year for 20 years in the S&P 500 from 2001 to 2020 wound up with $135,471.
That's only 10% less than the $151,391 you'd have if you remarkably invested your $2,000 at the perfect time in each of those 20 years — an impossible feat for most people.
Know The Costs Of Waiting
And the trouble with trying to time your long-term retirement savings contributions? It's not just improbable, it's paralyzing.
If investors sat on their hands waiting for the "right time" to invest $2,000 a share, and clung to cash, they'd only have $44,438 after 20 years, Schwab found. That's 67% less than the person who just bought annually without trying to pick the timing.
How Much To Save And Invest
Just how much should you put in your retirement savings? No amount is too small.
Mike Shamrell, Fidelity Investment's vice president of thought leadership, offers guidance. The firm encourages a 15% of income annual savings rate, including employee contributions and employer match.
Fidelity also suggests tracking your retirement savings progress. You should have saved at least one times your income by age 30, three times by 40, six times by 50, and eight times by 60.
"Most people are going to have some time to make changes, whether increasing their contribution rate or something else, to keep their savings efforts on track," he said.
Consider Buffering Downside Risk To Retirement Savings
Today's rising inflation and struggling stock prices are a reminder of the risk of a perfect storm raging, right when you want to retire.
For those closer to retirement, LaVigne suggests some type of protection strategy. These include a newer type of exchange traded fund called buffer ETFs. These limit downside risk in exchange for capping upside gains. Another option is buffer annuities, now known as registered index linked annuities, or RILAs.
With buffered products, the downside loss is protected to a certain extent, not eliminated. If the index declines 27% over a one-year return period and the fund has a 10% buffer, an investor will experience a roughly 17% loss.
RILAs can have a 10%, 15%, 20% or even 30% buffer. A higher buffer means lower potential upside, but softens the blow on the downside.
Buffer products "can give some of the market performance you need in order to get back on track," LaVigne said. And when you run into another downturn like this one, "you've got some protections built in."
