How to Save For Retirement In a Volatile Market
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It seems like every other day more signs are pointing to volatility in the stock market. From Silicon Valley layoffs at major tech companies to news stories about the debt ceiling, it’s easy to feel uneasy in today’s economy. If you’re worried about your retirement savings disappearing overnight, you certainly have reason to be concerned.
As a millennial, I’m quite familiar with how a volatile market can wreak havoc on your short-term plans. In 2008, the bulk of my college fund disappeared thanks to market downturns. As a result, it’s only fair for people in my generation to have a relatively low-risk tolerance when it comes to retirement accounts. In a way, it’s almost like PTSD based on market volatility and past performance.
Of course, fear of a bear market isn’t a very good reason not to save for retirement. Despite market fluctuations, long-term investing is a tried-and-true strategy for generating retirement income and freeing yourself from your 9-to-5 job once you reach retirement age. At the same time, market conditions certainly necessitate a wise investment strategy. Keep reading for investment advice to keep in mind as you save for retirement in a volatile market.
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What you should know about investing in the stock market
The most important rule of thumb when considering retirement plans is to “set it and forget it.” Automating your investing is a surefire way to build your investment savings, and the S&P 500 index has historically performed quite well for investors using this strategy.
On the other hand, with so much up in the air as the world begins to emerge from the COVID-19 pandemic, it’s only logical to be worried about a major loss of principal. While historically, these sorts of fluctuations even out when you take the long view, that can be challenging when your fixed income is on the line in a down market. Here are a few strategies to put your mind at ease as you make the most of retirement savings in a volatile market.
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Strategies to help you save in a volatile market
You may not be able to control how market conditions affect things like stock performance and interest rates, but there are some steps you can take to better set up your retirement account for success.
Start saving ASAP
When’s the best time to start saving for retirement? Yesterday. When’s the next best time? Today, of course! Thanks to compound interest, the sooner you can get saving, the more money you can earn for your retirement account. Even an annuity will pay compound interest, so in most cases, if you’re saving for retirement, the sooner you can start, the better.
What is compound interest? Put simply, compound interest is calculated on both the principal and the interest earned. This means you earn interest on your interest, which can be very powerful in the long term.
For example, if you have an initial investment of $100 and only invest $50 a month after 30 years and with an average rate of return of 3%, you’ll have roughly $28,787 — and you’ll have only invested $18,100. If, on the other hand, you have a shorter window of time for your money to grow, things get a bit less impressive. This is true even if you invest more!
For example, keeping the same rate of return but starting with a $1,000 initial investment and $100 monthly contributions, after 10 years, your account would only be worth about $15,100.57. This is even though your total investment contributions over those 10 years total $13,000. As you can see, saving sooner allows you to harness the power of both time and compound interest to achieve impressive results.
Diversify your portfolio
One way to help protect yourself as an investor is to avoid putting all your eggs in one basket. With diversification, you can spread your risk across various investment vehicles, including stocks, bonds, and mutual funds. This helps you cover your bases so that if one of these asset classes takes a dip, you aren’t losing all your investment by going all-in on one type of investment.
Create (and stick to) a budget
It might seem odd to think about budgeting as a proactive measure for fighting volatile markets, but if you can really dial in your budget, you are setting yourself up for success in retirement. Since retirees make withdrawals from their retirement accounts and generally have a fixed monthly income. This includes any money from their 401k (or other retirement funds) and their Social Security distributions.
If you are used to creating—and sticking to—a monthly budget, you won’t have to worry as much about volatility. This is because you will have already built up some of the financial habits and discipline necessary to roll with the punches and manage your budget responsibly if the value of your annual distributions decreases due to market changes. Serious savers may even want to look into the power of reverse budgeting.
Creating a budget today is also a helpful way to increase your overall retirement contributions. While reigning in your budget, so you only eat out twice a month may not seem like it has a huge long-term impact on your finances, if you invest those savings in 20 or 30 years, it could be worth thousands. Since saving as soon as possible is another useful strategy for facing down volatile markets, it only makes sense to increase your savings with a solid budget when possible.
Tap a financial advisor for advice
Of course, while many companies make choosing target date retirement accounts simple, it may be worth speaking with a financial advisor if you’re truly concerned about volatility or have a very low-risk tolerance.
A financial advisor will cost you some of your investment returns, but they may also be worth the fee by giving you peace of mind about your financial future. From outlining your investment objectives to helping you with asset allocations and rebalancing, financial advisors have a fiduciary duty to help you to the best of their abilities.
In short, having a trusted professional to guide you through a volatile market can pay big dividends—literally and figuratively!
Costs
Generally speaking, the only cost of investing in your retirement is the money you contribute to your retirement account each month. However, in a volatile market, there are a few other costs to consider when investing.
Opportunity cost
Any time you spend money on one opportunity, you don’t have the money to spend elsewhere. This may seem obvious, but the opportunity cost may be more pronounced or exaggerated if you're investing in a volatile market. For example, when you invest in a down or bear market, your potential for gains is much higher. As such, you may feel the opportunity cost more acutely if things fluctuate the other way.
Short-term losses
Due to the swingy nature of a volatile market, there are times when your short-term losses may be particularly large. If I look at my rate of return for today, it’s only 1.33% so far. However, it may have ranged from -18% to 5% in any given month last year. If you are thinking about your portfolio short-term, there are situations where you may “lose” a portion of your portfolio just based on market swings.
Financial advisor fees
If you choose to work with a financial advisor, you’ll owe a percentage fee on the balance of your portfolio. Most financial advisors charge anywhere from 0.5% to 2%, depending on the value of your retirement account. While this can certainly eat into your profit margins, it may be worth it if you need the peace of mind that comes with a financial advisor’s expertise.
Remember that even a small fee can become a large portion of your retirement earnings once they hit six figures. For this reason, some investors try to do it independently rather than working with someone else. This works better in a volatile market if your risk tolerance is higher since there is a certain level of security from working with an advisor who lives and breathes investments daily.
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Pros and cons
Pros
- Diversification is a good thing. Diversifying your portfolio reduces your risk, so it’s a good strategy outside a volatile market. Spreading out your risk can help you create a more consistent, sustainable retirement income, which is an advantage of focusing on diversifying during a volatile market.
- You might see large returns. If you’re investing during a bear market, the cost per share will be lower. This means that as the market recovers, your investment has the potential to grow at a bigger rate than if you invested during a more stable market. This is one reason it’s important to consistently and regularly invest, regardless of the market.
- Short-term trading possibilities. While short-term trading isn’t generally recommended if retirement is your long-term focus, it’s worth noting that short-term trading during a volatile market does give you a chance to make some big returns.
Cons
- Stressful. Even if you know you need to stay the course, it can be mentally stressful to be living through a volatile market. Especially if the market is volatile as you approach retirement age, stress can be a major disadvantage about investing during a volatile market — even if you mentally know about the advantages that can come from it.
- Can be more difficult than stable markets. Investing in an unstable market can be challenging since the “good” stocks and assets to pick can be more difficult to identify. This may be why you want to explore working with a financial advisor, or you might decide to invest in a target date retirement fund and just call it a day rather than trying to take a hands-on approach to your investing.
- High risk. As noted in this article, saving for retirement through a volatile market is quite risky. While there’s not much that you can do about this if you’re focused on saving for retirement, it’s worth noting that investing during a risky market can make it harder to adjust accordingly as the market fluctuates.
The bottom line
If there’s one thing to take away from saving for retirement in a volatile market, it can be mentally challenging and a little bit scary. After all, big market swings making the headlines can make it hard to look forward to your future, especially if you are counting on a fixed income to be able to retire.
While the general rule of thumb is to stay focused on the long-term when investing, it’s only human to have headlines intrude on your financial plans to cause worry. As such, there are a few things you can do to minimize your investment risk. From working with a financial advisor to investing early or diversifying your portfolio, you can take a few concrete steps to minimize how much of a hit your account takes during a volatile market.
Ultimately, much of saving for retirement during a volatile time comes down to your own mental fortitude. It can be difficult to stay the course when you see your year-to-date earnings in the negatives. At the same time, remembering the power of compound interest and taking a long view can help give you peace of mind.
It’s important to save for your retirement now if you want to be able to retire in the first place. Plus, if you start investing in a bear market, your potential gains are higher in the long run because there’s more room for your investment shares to grow. Keep the above in mind, and you’ll be well on your way to protecting your nest egg.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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