How to Save Money for Retirement in a Volatile Market

Presented By: Pennsylvania Capital Management

If you think putting money into an account like a 401k or IRA is one of the best ways to save money for retirement, there are some important things to consider. 

First, the number of 401k and IRA millionaires have gone up – and then back down again – in recent years due to market volatility. When the market was up, the number of 401k millionaires reached a record high.

Back in 2019, Fidelity did a study about this record-breaking number of 401k millionaires. 

• According to Fidelity, 1.6% of its existing retirement accounts had a balance of $1 million or more in 2019. That amounted to approximately 441,000 accounts. 

While this study focused on 401ks, the implications extended to IRA account holders as well. If you tack on wealth accumulated from investments, inheritances, and other sources of income, then there is still a lot to support the fact that people’s retirement accounts are in reasonably good shape. 

For folks who have been diligently planning for retirement and have almost reached that stage of their lives, the number of 401k millionaires in recent history might be good news. Unless, of course, you don’t have that kind of balance in your existing IRA and 401k accounts. You might also be someone who thinks a lot about market volatility and how that impacts – or has impacted – your retirement accounts post-2020, when it took a downward trend. 

If this sounds like you, don’t panic. We’ll cover some strategies to help you build wealth, add funds to your retirement accounts, and develop better savings habits that can lead to a better position when you’re ready to retire. 

Likewise, if you’re not quite ready to start thinking about in-depth retirement planning yet and you’ve got plenty of working years ahead of you, these strategies can easily become lasting habits that will help you become savvier and hopefully more financially comfortable down the road. 

How Much Money Are Americans Saving For Retirement?

The study by Fidelity uncovered information about how much money Americans were saving back in 2019. 

• On average, Americans had $112,000 in their 401k accounts and $115,000 in their IRA accounts. 

This $112,000 reflects a 7% increase from the previous year’s quarter, where Americans reportedly only had an average of $105,000 in their retirement accounts. 

Now, your instinct might be to think the market increase is the cause for this kind of increase in people’s retirement accounts. But the truth of the matter is that it’s only partially to blame. 

For those who are concerned about how the market will affect their retirement account balances, I have some good news: The rest of the increase came from people saving more money and putting more into their retirement accounts. 

• ⅓ of retirement plan participants increased the amount of money they were saving for retirement by 3% before 2020. 

So, how did so many people end up with a significant increase in their retirement accounts? Two reasons:

• Money earned from the market increase and capital appreciation 

• Compound interest applied to the increased funds in people’s retirement accounts

The combination of people increasing their retirement account balances from the market’s capital appreciation and the compound interest that already applies to the money in the account equals increased growth. 

Retirement Accounts Are More Accessible Than Ever

To continue the record-breaking trend, retirement accounts are becoming more accessible than ever for employees. Where some people may have been unable to either enroll in these plans or didn’t work for an employer who offered them previously, the tides have started to change as more employers start to offer retirement accounts and begin to automatically enroll new employees into workplace retirement plans. 

When the market is good, increased capital gains combined with more people saving money in retirement accounts bode well for the potential number of future 401k millionaires – and you could be one of them. 

As this trend continues to catch fire with small business owners and CEOs of larger companies and corporations, people will be able to access these accounts in a way they may not have considered before. 

In general, people are becoming wise to the concept of investing and saving money for their futures. Employers, too, are becoming more well-versed in the 401k space and have the opportunity to set things up correctly due to having access to better information and simply knowing more about the subject and what’s needed for their employees. 

Baby Boomers May Struggle to Save For Retirement

While there’s a lot of good news to be shared regarding the increasing number of 401k millionaires, there’s a flip side to discuss. People in the Baby Boomer generation are in a bit of a precarious situation where their retirement is concerned. 

• The average balance of a Baby Boomer’s 401k account was about $210,000 last year. 

However, it’s important to note that this average is skewed by the number of people with high-balance retirement accounts. If you apply some math, you can see that the median sits around $70,000. 

There are a couple of things to consider here: 

1. If you do a drawdown of 4% in a portfolio with $70,000, you’re only going to be able to take about $2,800 a year from that retirement account. 
2. Retired people are often on a fixed or limited income – and $2,800 a year is not going to go very far. 

We want to be realistic with our clients to make sure they’re comfortable and haven’t saved under the amount they need to live the life they want in retirement. For Baby Boomers who are banking on their retirement accounts to take care of them, $70,000 may not be enough. 

Now, there is a silver lining when you factor in that many older people do have some financial advantages. For example, they may have already paid off their homes, and therefore wouldn’t have a mortgage payment. They may not have an abundance of debt, and they may not need a lot of money to live if they are healthy. 

Conversely, if they have medical bills – or have future medical issues that require hospital care, prescription medication, and other similar expenses – money may become more of an issue. 

Working Longer Can Help You Save More For Retirement

A lot of Baby Boomers are working for a longer period than we’ve seen historically, which does allow them more time to save money – and hopefully put more money away into retirement accounts, if that is how they choose to save. 

Some of our clients look into this as a strategy. For example, they think about how much money they could save by working for about 5-10 years longer and retiring in their 70s instead of their 60s. 

• If you’re in your highest earning income years, you’ve paid off your mortgage, you don’t have children living at home to take care of, and your expenses are kept low, you could save a lot of money over a few years if you are diligent. 

We tell clients all the time that they should work as long as they’re happy, healthy, and enjoy it. For some people, working doesn’t feel like work. They do something they enjoy, it makes them a little money, and that money can be enough to live on, in some situations. Retirement isn’t a mandate, after all. 

Consider How You Can Downsize Your Expenses

Another one of the best retirement strategies, which can be used in conjunction with working longer or separately, is to really take a hard look at your expenses and decide where you can cut costs. 

Here are some areas to consider:

• Do you have a large home? If so, do you need that home or could you sell and downsize to a smaller one? 

• Do you have multiple vehicles? If so, do you need all of them?

• Could you take fewer trips?

• Do you have a second home that you could use as an income property or sell and put that money into savings?

• Are you sinking money into a timeshare that you don’t use?

While some things may feel more like a sacrifice, you have to consider what you want – and if retirement is a goal for you and you need the savings to live that lifestyle, it might be time to make some changes that free up some additional money that could be funneled into your savings. 

Maximize Your Yearly Catch-Up Contributions

Once you’ve reached age 50 or older, you are eligible for catch-up contributions to your retirement accounts. If you’re able to maximize the money you can get from these catch-up contributions, that can also be a way to put more money into your overall savings. 

If you’re over 50, you may be eligible to draw an additional $6,500 from these catch-up contributions. 

• For this year, you can put $19,500 into a Roth IRA or 401k and get an extra $6,500 if you’re over the age of 50. 

Double-check to make sure you really are maxing out what you can contribute, because a lot of the time, we’ll run into situations where our clients swear that they are maxed out, but in reality, they’re $4,000 short. The reason this happens is that they’ll abide by the previous year’s – or sometimes multiple years’ – contribution, and not realize that the maximum has increased. 

You can help remedy this by keeping a close eye on your 401k balance. Check it more often than you think you need to, or even check it every day. 

There are other ways you can maximize these catch-ups, too. For example, high-deductible healthcare accounts. A family plan, for example, can put away $7,100 into an HSA, and if the main member of the family plan is over the age of 55, you can get an extra $1,000. 

By looking into where you can find additional funds based on what you’re already contributing, you might end up saving even more than you thought possible. 

How to Prepare for Market Volatility

Since 1980, there have been 12 stock market corrections. 

What does a stock market correction mean?

• A correction happens when stocks decline by 10% or more within a given period. 

Piggybacking off of this, we have the bear market. Bear markets are when stocks decline by 20% or more. 

A bear market averages for about two months and is commonly linked to recessions or other systemic shocks in the economy. Since the beginning of the COVID-19 pandemic, the markets have been volatile. If you’re an investor who is trying to invest for the long term, you want to be prepared for whatever the future of the stock market could hold. 

First, it’s important to clarify what a market downturn means. 

If you’re in a balanced portfolio – like 60/40 – you might have a natural instinct to cash out when the market takes a turn and becomes volatile and then get back in. The all-in/all-out strategy tends not to work. 

Vanguard measured backtesting for a 60/40 portfolio during a pretty nasty time in the markets. What it found was, if you invest $1,000, your portfolio would have still doubled between October 7, 2007 – the peak of the pre-financial crisis – and June 30th, 2019. 

At the end of that period, someone’s $1,000 was worth about $2,215. That wouldn’t have happened if they pulled out during a downturn. That works out to about 6% a year, which isn’t a huge gain, but it’s better than if you would have flipped and gone all to cash. You’d only have $951, so you would have lost money by playing it safe. 

• You have to understand that playing the stock market is going to be a bumpy ride. 

Stay invested, be invested in being an investor for the long-term, but have a strategy and a plan for how to manage the downturns when they happen – because they will happen. 

Now that you’ve learned that you have to ride the wave, how can you do that without too much risk – or unnecessary risk? 

• One of the smartest things you can do in a downturn market is learn to tune out the noise. 

Don’t pay attention to what the news is saying about the stock market plummeting or making bad predictions, especially if you’re still working and contributing to your IRA or 401k accounts. Continue to make those monthly contributions at a level that’s comfortable for you to afford. 

• If you look at your portfolio on a weekly basis, change the frequency of how often you check on it. 

Instead of looking at your portfolio every week, look at it every two weeks – or even every month. If you really want to forget about it because you think the market will be in a downturn for a longer period, check it every quarter. You do still want to keep apprised of how it’s doing so you can make sure there isn’t anything to worry about, but minimal losses don’t need to be a constant source of stress and worry. 

Now, if you’re 100% into the markets, you may need a different strategy. That’s where you’d reconsider areas like asset allocation and make changes to operate with a more balanced portfolio so you’re not going to experience such intense losses if the stock market does take a downturn or stays in a downturn for a long time. 

Invest Comfortably In the Stock Market

Ultimately, you want to make sure your portfolio is balanced in a way where you’re comfortable. If market volatility scares you, then you probably don’t want to be 100% into the markets. You might be better suited for a 60/40 split, or even a lesser split, like 20% or 30%. 

Diversifying your portfolio also can help you strike the right balance. For example, if you’re all in on U.S. large-cap stocks, you might want to take a step back and look at other places you could invest. 

• Do you own stocks in any emerging markets?

• Do you own stocks in any international companies?

• Do you have short-term bonds? 

• Do you have a chunk of cash?

Regardless of how you diversify, having this variety in asset classes can come in handy. For example, if the stock market takes a downturn and bonds have an upswing, that can help offset some or all losses depending on what happens and what you have/how much you’ve invested.

One silver lining in regard to times when we’re experiencing a pullback in the market is that it’s a fantastic opportunity to rebalance and go over your portfolio to see what you can move around and change to give yourself a little more leeway to ride the wave.

However, you have to be realistic about your expectations. The S&P isn’t going to be up 30% every year – and it won’t be down every year, either. 

• The historical average stocks are between 7-10%. 

To put this into perspective, this means the S&P moves more than 10% in either direction every year, 7 out of 10 over any 10-year timeframe. 7 out of 10 years, you’re either up 10 (or more) percent or down 10 (or more) percent. That’s how you get the average. 

Now, you might think that you’ll have stocks that you’ll never sell – but these times in the market are great gut-check opportunities to really consider whether you should sell. It’s one thing to say you’ll never sell even if a stock drops 10%, 15%, or even 40%, but there are some times when you might want to reconsider this line of thinking. We’ve had some interesting times in terms of the economy, from global pandemics to wars to recessions – and those are sometimes good times to sell stocks. 

Make sure your growth assumptions match your time horizon as well as your goals, especially if you’re close to retirement and are depending on some of those returns to be your income after you stop working. And, above all else, get a good financial advisor to help you determine the strategies that are going to work the best for you and take your unique portfolio into consideration rather than going by generic, “rule of thumb” advice. 

How Investments Can Help You Save Money

A lot of people ask: “Hey, are you buying stocks today?” If you’re in your 20s or 30s, the answer to this question should always be “Yes.”

You might think that if you buy on days when the market dips vs. buying regularly, you may outperform the market. Let me present a different way of thinking for you. 

• What would happen if you invested $1 a day and added an extra dollar on days when stocks fell 2%?

If you started doing this back in 1990, your dollar-cost averaging amount would be $41,348 and your account from when you invested only during the dip days would be $41,079. It’s very close and, for some, perhaps too close to make a difference. However, it does illustrate why you want to buy – but you don’t want to pick and choose based on the market timing. 

For those who are still thinking it’s better to buy during the dip, how do you know when a dip is a dip? You won’t know with certainty for six months to a year afterward. 

By taking a dollar-cost averaging approach – whether as an individual or as a joint-taxable account – you’re desensitizing yourself to the markets. I often encourage people to remove their emotions from investing. If you invest a dollar a day, you’re setting aside money for your retirement no matter what happens – and you’re investing a little extra on certain days, but not too much extra. 

Investing can help you save money for retirement, but it’s especially effective when you’re young and you have a time horizon of 40 or 50 years before you may want to retire. 

Save What You Can, When You Can, For As Long As You Can

When is a good time to invest or save money? The answer to this question is also a simple “yes.” 

People can get caught up thinking about whether they should wait for pullbacks or the right timing – but the right timing is now. If you don’t need the money today, you don’t need the money for five years, and it’s possible the market will continue to grow over the next five years, why not invest? Spend a little now to accumulate more later on down the road. 

Another reason pullbacks aren’t the best idea is that 95% of the time, the time you buy won’t be the lowest price. You may think you’re getting the best deal today, but in a few months’ time, you’ll realize it would have been even better. It’s a game of roulette, and if you spend too much time waiting on the right time to save or invest, you’ll have wasted time you could be spending wisely by saving money for your future. 

None of this means you should act recklessly and dump all your money into the stock market, so you need to anticipate the pitfalls and have other things in place, like an emergency fund, to keep yourself afloat if there are losses. 

• Your emergency fund should be enough to make you feel comfortable, but we recommend at least six months. 

If you feel like you need a little more wiggle room in your emergency fund or just want to be extra cautious, consider saving 12-18 months on the sideline as a rainy day fund. 

None of the existing 401k millionaires got to that level without making recurring investments either in the stock market, their retirement accounts, or a mixture of other areas in their overall portfolio. Save what you can, save it whenever you can, and do it for as long as you can. That’s the way to ensure you’ve got enough to be comfortable when you do decide to step back from work or, in some cases, be completely retired.