Your second quarter 40lk retirement plan statement should arrive in the mail any day now. Be prepared for some big surprises.
The Balance Shock
Everyone starts by looking at their account balance. Be prepared. It will be dramatically lower — especially when compared to your 2021 year-end valuation. The second quarter was one of the worst on record for stocks, but even worse for bonds since they lose market value when interest rates rise.
Statistics like a 20% decline in the S&P 500, or a nearly 30% decline in the NASDAQ, sound even scarier when they are translated into the actual shrinkage in your retirement assets. Then the numbers become real and personal.
So, take a deep breath. If you’re not facing the need for immediate withdrawals, no action is needed. Don’t look backward with regret. We all know hindsight is 20/20!
And if you must look backward, please take a longer perspective. This 12-year long bull market created a massive increase in retirement account balances along the way. So losses turn into bigger numbers. This decline is not unique – except to you.
The bear markets in 2008-9 and 2001-2 resulted in a drop of nearly 50% in the S&P 500. Yet each time, within a few years the market moved to higher peaks. Selling out and/or stopping contributions meant you permanently lost the rebound, and also the percentage gains in your continuing contributions along the way.
Most retirees have rolled over their 40l(k) assets to an IRA, as I’ve discussed in previous columns. In general, this same advice applies to them. I’ve consistently warned that since retirees are no longer making contributions, they need a more conservative investment allocation – and some liquidity in the form of a money market fund – to protect them from the helpless feeling of shock that a bear market always generates.
But it’s too late to panic now. And this column is directed to active 40lk plan participants –so please share with those younger than you. They have the greatest asset on their side: Time!
The Second Shock — Lifetime Income Projections
There will be something new on your second quarter 40lk statement – a projection of how much income you could get in retirement based on your current balance. It’s an illustration required by the Secure Act passed by Congress in 2019. The purpose is to give plan participants an idea of how much monthly income they could derive from their portfolio balance — if they were currently age 67!
The number may be shockingly low. For example, a 40lk with a balance of $125,000 would translate into a lifetime income of just $600 a month if you were age 67.
My personal opinion is that this illustration is totally misleading!
If you’re years from retirement – and all plan participants will get this illustration regardless of age – you have many years ahead of you to increase your contributions and grow your account balance. To assume that your investment life will remain static over the next 20+ years until your retirement is simply wrong.
And on the other side, the illustration doesn’t take inflation into account. At 8% inflation, the spending power of that $600 monthly check will be cut in half in 10 years!
Historically, broad stock market investment growth has matched or exceed inflation over 20-year periods.
There is only one value to this illustration and that is to show you that you probably should be saving a lot more in your retirement plan.
Yes, saving for tomorrow takes away from today’s consumption. That’s especially difficult at a time when inflation in the form of food and gasoline is also digging into today’s consumption.
You have two options if you’re still working. The first is to ignore these projections and live for today. After all, there is never a guarantee of tomorrow. The second is to increase your retirement plan contributions. They’re a tax deduction, and hopefully you get the benefit of a company match. Best of all, they are taken out of your paycheck before you see the money and spend it!
Don’t bemoan the losses on your second quarter statement. Make up for them with increased contributions that will grow over the years ahead. One day, you’ll be glad you did. And if you aren’t still working and able to contribute, please take the long-term perspective and don’t panic sell your future. The market will come back, and you’ll need it. That’s The Savage Truth.