The defeat in the US stock market that put US stocks init’s not just reducing the net worth of billionaires like Elon Musk and Jeff Bezos. It’s also taking a toll on Americans’ retirement savings, wiping out trillions of dollars in value.
The sale erased nearly $3 trillion from US retirement accounts, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. According to their calculations, 401(k) plan participants have lost about $1.4 trillion from their accounts since the end of 2021. People with IRAs — most of which are 401(k) rollovers — have lost $1. 2 trillion this year.
This year’s stock slump is the worst market downturn since March 2020, when COVID-19 broke out in the US.
“Anyone who has to retire when the market is down is in a bad position,” Munnell said.
“Younger people, you can expect – these things have come back time and time again,” she added. “But people who use retirement money to support themselves really suffer from these kinds of events.”
Investor concerns over spiraling inflation and rising risks of recession are weighing on financial markets. Reflecting these fears, the Dow Jones Industrial Average on Thursdayfor the first time since January 2021. The S&P 500 is down 24% from its January record, while the Nasdaq is down more than 30% from its November peak, putting both in bearish territory.
bubble losing air
Retirement accounts are the primary channel through which most Americans are exposed to the ups and downs of the stock market. Nearly three-quarters of all 401(k) money is held in equities, according to a 2021 Vanguard report. The Nasdaq Composite is down more than 30%.
To be sure, many Wall Street professionals saw the stock rally last year as a bubble fueled by speculators looking for a place to park new money. But that doesn’t make the loss any easier to swallow for most workers, who don’t have the time, skill or interest to try to time markets.
“One could argue that these recent losses are simply wiping out the extraordinary gains that took place from mid-2020 to the end of 2021, so people aren’t actually worse off than they were before the pandemic,” Munnell wrote in a blog post. , first shared with CBS MoneyWatch. But human nature being what it is, “earlier gains were permanent, so recent losses are no less painful.
More risk, less reward
For many low-income people, the growing popularity of so-called target date funds has also made retirement savings riskier, Munnell noted. Left to their own devices, wealthier investors tend to choose riskier assets like stocks. However, due in part to automated retirement tools, the lowest-paid participants today are slightly more likely to have cash in stocks, according to Vanguard data she analyzed.
Among workers with 401(k)s, those earning less than $30,000 a year had 81% of their retirement fund in stocks, while for those earning more than $150,000, the figure was 76%.
Target date funds are a popular set-and-forget option for choosing a retirement plan, with more than half of all 401(k) participants owning a target date fund, according to Morningstar Direct, a investment research firm. .
But data shared by Morningstar shows that the most popular target date funds – mutual funds that hold a variety of investments and that automatically adjust according to a “target” retirement date – have lost between 10% and 22% of their assets under management this year. (These losses are due to a drop in stock values, as well as participants withdrawing money from their accounts, Morningstar noted.)
Low 401(k) Savings
With the median 401(k) account with a balance of just $17,700 before the pandemic, this year’s market decline would reduce more than $3,500 in value. An aspiring retiree with a balance of more than $81,000 – which would place them in the top 25% of savers – would see their savings shrink to just $64,800.
These numbers underscore just how riskier retirement is today than for previous generations of workers, the vast majority of whom had employer-provided pensions that legally entitle them to a steady monthly pay after leaving the workforce.
“When the change from defined benefit to defined contribution [plans] happened, that change meant that the individual took on the risk of the investment,” Munnell said. “When the stock market is booming, it’s easy to forget about that. But when the market sinks, you have to remember that.”