Retirement Planning in Bull and Bear Markets

J.P. Morgan Asset Management has just published its latest Guide to Retirement, which includes important reminders for advisor clients in or near retirement and worried about the market turbulence. They should not cash out of stock positions during or after big down days like the ones we’ve been having for past month or so.

A $10,000 investment in the S&P 500 Total Return Index between Jan. 3, 2000, and Dec. 31, 2019, earning 6.06% per year would grow to $32,421 during those 20 years, but if 10 or 20 of the best performing days were missed, that gain would be less than half — roughly $16,000 if the 10 best days were missed and just $10,167 if 20 of them were. And if that investor were out of the market during the best 30 to 60 days they would have lost money — around 2% to 7%.

Moreover, it’s not unusual for the worst trading days to occur close to the best trading days, so getting out of stocks when losses are large and failing to get back in soon after could be disastrous. Six of the 10 best performing days in the S&P 500 during the illustrated 20-year stretch occurred within two weeks of the 10 worst performing days. In 2015 the time gap was even closer. The worst performing day was Aug. 24; the best performing day was also Aug. 24.

More recently, on Christmas Eve 2018, the S&P 500 lost 2.7%. Two days later, on the first trading day after Christmas, it gained 5%, its best single-day performance since March 2009, when the post financial crisis bull market began.

“Sticking to an investment strategy will benefit you,” says Katherine Roy, J.P. chief retirement strategist at J.P. Morgan Asset Management. “Weather the volatility.” Roy also suggests that investors maintain a three- to six-month buffer of emergency funds to cushion market shortfalls.

Retirement experts from The American College of Financial Services — Wade Pfau, Steve Parrish and David Littell — similarly recommend that investors draw from their buffer asset whenever their retirement portfolio balance falls below its level on their first day of retirement. The market will correct and if the current situation is hurting their income, “now may be a great time to make conversions to Roth IRAs (and pay a lower tax).”

Roy says investors should consider converting to a Roth during the early retirement years before required minimum distributions (RMDs) kick in (now at age 72 instead of 70-½ courtesy of the Secure Act) if those RMDs are likely to push the retiree into a higher tax bracket.

MagnifyMoney Survey

Stock market declines can rattle retirement savers. What about when the market plunges, as it did during the week of March 8–13, falling deep enough to trigger circuit breakers? MagnifyMoney, a LendingTree subsidiary, asked 740 Americans with a retirement savings account what percentage decline they could tolerate before abandoning stocks.

Nineteen percent of respondents said they would tolerate no more than a 5% market decline before giving up on stocks for retirement, even though slightly larger declines are becoming commonplace in today’s market, according to MagnifyMoney (which conducted the poll in the fall of 2019).

A third of investors in the survey said they could tolerate up to a 10% market decline before they would take their money and run. Only 22% of investors said they would leave their retirement funds in the stock market no matter how large a decline.

“Volatile markets can make us feel uncertain or scared about the future, and our survey shows that many Americans’ first instinct is to flee with their money, locking in a loss which may leave them out of potential market rebounds and meaningful gains,” said Josh Rowe-Heupler, general manager of investing for LendingTree/MagnifyMoney.

“Anxiety around the stock market is normal, but that doesn’t mean investors should automatically act on those emotions.”

Rowe-Heupler said sticking to one’s financial plan or asking a professional for help was a good way to combat fear amid uncertainty. “A financial advisor can be an excellent resource to help keep consumers from making decisions that they may later regret.”

The survey results showed that baby boomers had a stronger stomach for a stock market decline than younger investors. Thirty-eight percent of boomers said no market decline would prompt them to give up on stocks in their retirement plan, compared with just 18% of Gen Xers and 16% of millennials.

Here’s how the different generations responded with regarded to increasing market declines:

• Up to 5%: boomers – 18%; Gen Xers – 19%; millennials – 18% • Up to 10%: boomers – 23%; Gen Xers – 38%; millennials – 36% • Up to 20%: boomers – 17%; Gen Xers – 16%; millennials – 19% • Up to 30%: boomers – 3%; Gen Xers – 10%; millennials – 11%

Survey respondents who identified as Republicans exhibited a higher tolerance for stock market declines than those who identified as Democrats. Twenty-five percent of Republicans but only 19% of Democrats said they would stay in the market whatever the size of a decline.

The results showed that just 13% of parents with children under 18 would keep their retirement funds in stocks no matter how large the decline, compared with about 30% of parents with adult children or no children.

Millennial, Gen Z Obstacles

Members of Gen Z and millennials understand the value of building a retirement fund, but face conflicting financial concerns that prevent them from adequately preparing for retirement, according to a recent report released by Betterment for Business, a 401(k) service provider. By 2020, younger workers will comprise half the global workforce.

With workers increasingly responsible for funding their own retirement, confusing financial advice and subpar plans have left many unprepared and unaware of how much they need to be saving. Market Cube, a research panel company, conducted the online poll in late 2019 and received over 1,000 responses. Of these, 695 were millennials and 306 were Gen Zers.

Challenging Finances

The survey asked participants how they were doing with their finances. Seventy-seven percent of respondents said thinking about finances caused them stress. This is not surprising given that both generations are weighed down by unprecedented debt: Three in four said they owed credit card debt, with one in three owing more than $5,000; and nearly half had student loan debt.

Betterment said those with high levels of debt may need to significantly reduce their current spending rates, or face substantial lifestyle changes in the future.

Still, 82% of millennials and 71% of Gen Zers in the survey said they did not feel too young to start saving for retirement. About nine in 10 respondents overall reported that they actively saved some money every month, but a fifth said they saved less than $100 monthly in total, including in their retirement accounts.

“It’s clear that millennials and Gen Z want to save for retirement, but this goal can be deprioritized when they’re faced with student debt, medical bills, or other expenses that arise,” Edward Gottfried, director of product at Betterment for Business, said in the statement.

Employers are proactively trying to help, and employees are making the most of it, according to the survey. Millennials and Gen Zers said they expected their employers to play a role. Indeed, 40% of respondents asserted that they would not work at a company that does not offer retirement benefits or accounts.

Seventy-two percent of survey participants said their employer offered a retirement savings plan, and 80% said their company matched contributions to their plan. Almost half of respondents reported that they contributed 5% or more monthly, and 75% maximized their company’s match.

Outside of retirement plans, 48% of younger workers said their employers offered other financial wellness benefits, such as access to a financial advisor, financial planning tools or student loan assistance.

Forty-four percent of respondents said they were planning to save less than $1 million for retirement. Thirty-eight percent of respondents said they had tapped their retirement savings to pay for an unexpected expense, such as a medical emergency, or to pay off student and credit card debt. And 23% reported that they had taken out money for travel and leisure activities, jeopardizing their ability to retire and losing out on compounding investment growth.

Bernice Napach can be reached at bnapach@alm.com. Michael S. Fischer can be reached at msf7@columbia.edu.