Terry Savage: Your 401(k) statement is about to shock you
Your second-quarter 401(k) retirement plan statement should arrive in the mail any day now. Be prepared for some big surprises.
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 it was even worse for bonds since they lose market value when interest rates rise.
Statistics like a 20% decline in the S&P 500, and 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 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 401(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 401(k) plan participants — so please share with those younger than you. They have the greatest asset on their side: Time!
There will be something new on your second quarter 401(k) 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 401(k) with a balance of $125,000 would translate into a lifetime income of just $600 a month if you were age 67.