A 1, 2, 3 on 401(k) Day: 3 important reminders amidst market uncertainty

Sep 9, 2022

This year has been a tough one for retirement savings. Inflation is high, markets are volatile and it’s hard to know where we’ll be in a few weeks, months or even a year. This environment has made it difficult for many Americans to feel financially secure and some savers may have dipped into their retirement savings or used funds for other emergencies.

Even with all the uncertainty, it’s important to understand that a retirement plan can be your most valuable tool when it comes to saving for the long-term and feeling secure. Our 2022 Read on Retirement survey found that 63% of workplace savers – those with access to a workplace plan – feel on track for retirement, compared to about 51% of those without access.

So on this 401(k) Day, remember to keep sight of the bigger picture, resist the urge to stop contributing and understand that short-term volatility can be navigated for long-term success.

Take a long-term diversified approach

Retirement savings are invested for decades, which provides a major advantage over short-term volatility. With this in mind, it is crucial to stay on course when markets are volatile because blips in the markets may have little effect on your savings in the long run.

Additionally, if you are invested in a target date fund (TDF) – which is often the default in retirement plans – your fund is designed for the long-term, including periods of market volatility. TDFs take out the guesswork and adjust asset allocation based on your retirement age. For those nearing or in retirement, exposure to stocks will reduce overtime as investment in less risky assets, like bonds, will simultaneously increase. Younger investors with a longer investment timeline will have more exposure to stocks, allowing them to benefit through market improvements.

Stay invested

This isn’t the first time that markets have been in flux, nor will it be the last. For those who are able, staying invested is the best plan for long-term results. Remember: it’s time in the markets, not timing the markets.

Shocks to the market can make it tempting to decrease how much you save, or even stop saving altogether. However, that may lock in losses if you miss a recovery, and you could end up selling low and buying high.

Missing days when the markets are rebounding can be costly. In fact, every major decline from 1987 through 2020 in U.S. equities has reversed itself between 21% and 68% within the following year.

If volatility is a concern, one approach might be to avoid checking your plan daily. Review performance in the long-term, such as quarterly or even annually. The further away your retirement, the less you may need to worry about daily changes to your balance.

Try not to take money out

Taking money out of your retirement plan has drawbacks, such as penalties and losses to your long-term savings. If you leave a job with an unpaid loan from your retirement plan too, it may be treated and taxed as income, which can add more costs.

This is where emergency savings separate from your 401(k) or retirement plan becomes so important. Emergency savings can give you the short-term liquidity you may need, without incurring additional costs or losing out on potential market return. Indeed, those with emergency savings have been half as likely to tap their retirement savings during the pandemic.

No workplace retirement plan?

If you don’t have access to an employer-sponsored retirement plan, 401(k) Day is still a great opportunity to evaluate your retirement savings picture. You can consider setting up an Individual Retirement Account (IRA) as a way to build up your retirement assets while taking advantage of market growth. You may also want to check if you have a 401(k) from a previous employer as these accounts do not automatically transfer to your new employer when you change jobs.

The bottom line

Whether it’s around the corner or decades away, many people are wondering how the current market conditions will affect their retirement. These are certainly valid concerns, especially since it’s been decades since inflation has been this high and it’s never been coupled with this kind of market volatility – or in the wake of a global pandemic.

While it’s difficult to predict where we’ll be next, the best choice may be to stay the course.

Anne Ackerley
Managing Director, Head of BlackRock's Retirement Group
Anne F. Ackerley, Managing Director, is head of BlackRock's Retirement Group (RG), bringing the defined contribution and retirement insurance businesses together with an innovative retirement solutions group to tackle the industry's toughest challenges.