Younger investors have mostly recovered from the market turmoil of 2022 in the realm of retirement savings. Older investors have not.
According to data from Fidelity Investments, by the middle of 2023, the typical millennial saver had recovered all of their losses from the year before. Millennials’ average 401(k) balance increased from $48,000 at the end of 2021 to $48,300 as of June 30.
Baby boomers, by contrast, remain underwater. By the end of June, boomers’ average 401(k) account held $220,900, down from $249,700 at the end of 2021.
According to Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, last year “was an extremely difficult year for investors.”
Stocks have moved plenty in 2023, if not necessarily up. The Dow Jones Industrial Average is currently trading close to its starting point for the year, around 33,000.
“There was supposed to be a rally,” said Greenwich, Connecticut-based certified financial planner Lili Vasileff. “It hasnt happened. If anything, its fizzled. “.
However, older investors have encountered a distinct difficulty this year: recuperating from the previous year’s severe losses in both stocks and bonds.
Keywords: 401k, retirement savings, market volatility, inflation, financial stress, savings rate, investment strategy
The year 2022 was a tumultuous one for investors, with inflation hitting a 40-year high, interest rates soaring, and the stock market experiencing significant volatility. As a result, many employees saw their 401(k) balances take a significant hit. This article will analyze the current state of 401(k) balances and provide insights on how to navigate the current market environment.
Key Findings:
- 401(k) balances plummeted in 2022: According to reports from Fidelity Investments and Vanguard, the average 401(k) balance fell by approximately 20% in 2022. This decline was driven by a combination of factors, including market volatility, inflation, and rising interest rates.
- Employee savings behavior remained consistent: Despite the market downturn, employees continued to save for retirement at a consistent rate. The total savings rate for the fourth quarter of 2022 held steady at 13.7%, indicating that employees are recognizing the importance of long-term savings.
- Some employees dipped into their retirement accounts: While the majority of employees maintained their savings habits, some dipped into their retirement accounts to cover short-term expenses. This highlights the financial stress that many employees are experiencing.
Current State of 401(k) Balances:
The recent market rally has helped to recover some of the losses experienced in 2022. However, 401(k) balances are still below their pre-pandemic levels. According to Fidelity Investments, the average 401(k) balance as of June 30, 2023, was $106,700, which is still 18% lower than the average balance at the end of 2021.
Strategies for Navigating the Current Market Environment:
- Stay the course: The best strategy for most investors is to stay the course with their long-term investment plan. This means continuing to contribute to their 401(k) on a regular basis and avoiding making any impulsive decisions based on short-term market fluctuations.
- Rebalance your portfolio: If your portfolio has become unbalanced due to recent market movements, it may be a good time to rebalance. This involves adjusting your asset allocation to ensure that it aligns with your risk tolerance and investment goals.
- Seek professional advice: If you are unsure about how to navigate the current market environment, consider seeking advice from a financial advisor. A financial advisor can help you develop a personalized investment plan that meets your specific needs and goals.
The year 2022 was a challenging one for 401(k) investors. However, the recent market rally has helped to recover some of the losses experienced last year. By staying the course, rebalancing your portfolio, and seeking professional advice if needed, you can position yourself for long-term success.
Additional Resources:
- SHRM: 401(k) Balances Plummeted in 2022
- USA Today: 401k balances haven’t recovered from 2022 for retirement-age Americans
- Alight: How Are 401(k) Balances Doing in 2023?
Frequently Asked Questions:
- What is the average 401(k) balance in 2023?
- As of June 30, 2023, the average 401(k) balance was $106,700.
- How much should I be contributing to my 401(k)?
- The recommended savings rate for retirement is 15%. However, the amount you should contribute will depend on your individual circumstances, such as your age, income, and risk tolerance.
- Should I rebalance my 401(k) portfolio?
- It is a good idea to rebalance your portfolio on a regular basis to ensure that it aligns with your risk tolerance and investment goals.
- Should I seek professional advice?
- If you are unsure about how to navigate the current market environment, consider seeking advice from a financial advisor. A financial advisor can help you develop a personalized investment plan that meets your specific needs and goals.
Disclaimer:
The information provided in this article is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for personalized guidance before making any investment decisions.
Bonds backfired on boomers in 2022
The Vanguard Total Bond Market Index is down about 15% since the autumn of 2020, when it stood near its all-time high, according to Vanguard.
By comparison, the Dow is trading at about 2010% below its historical peak, which was reached in January 202022.
The combined losses in stocks and bonds resulted in a steep decline in the value of the average boomer, or E2%80%99’s 401(k). This decline started at $249,700% at the end of 202021% and ended at a low of $197,400% in the autumn of 202022, representing a drop of more than 2020%, according to Fidelity.
The average boomer account had recovered to $220,900 by mid-2023, falling short of the high of 2020–21.
Despite the fact that stocks are trading higher than in 2019, many retirees believe their financial situation has gotten worse since the pandemic started.
In an annual Transamerica Retirement Survey, released in September, 33% of retirees said their finances had worsened in those years, while only 9% said they had improved. The Harris Poll conducted the survey, which covered a representative sample of over 50 workers and retirees.
Younger generations have fared better. As per the data provided by Fidelity as of June 202023, the average Gen X retirement account stands at $153,300, a decrease of 8% since the end of 202021. Millennials are up 1%, at $48,300. Generation Z is up 53%, at $8,100.
Officials from Fidelity warn that those averages are a rough gauge of profits and losses. Changes in the number of investors can have an impact on the average 401(k) account’s value as they depart with their money. While younger savers accumulate more money in their accounts, some boomers who are retired are depleting theirs.
And that’s another reason why older investors have found the past year to be so perilous.
The worst year ever for stocks and bonds?
Stocks shed 18.6% of their value in 2022, as measured by the S&P 500, a loss that swells to 25% after adjusting for inflation, according to a NASDAQ analysis.
Bonds lost 13. Seven percent of their value, based on the Vanguard Total Bond Market Index According to NASDAQ, inflation pushes that figure to 2020%, which would be the worst bond return in 2097 years.
A brief overview: In order to raise capital from investors, governments and businesses issue bonds. Bonds reward buyers with interest payments. A bond’s value fluctuates according to how appealing it is to investors. The yield on an interest rate decreases when the market price rises, and vice versa. Bond funds’ returns, like those of the Vanguard index fund, are determined by the market value of the fund’s bonds as well as interest income payments.
Bonds serve as a hedge against stocks. Bond values are generally steady and rise in response to declines in stocks.
“In a normal year, you would really see bonds serving as ballast in a portfolio when stock prices are falling,” said Andy Baxley, a certified financial planner in Chicago. “There wasn’t anywhere to hide last year, unfortunately.”
Taken together, double-digit losses in stocks and bonds made 2022 “the biggest outlier year in history,” said Jim Reid, head of thematic research at Deutsche Bank, speaking to MarketWatch.
And that is why older investors are suffering.
Retirement savers are advised by conventional wisdom to progressively switch from stocks to bonds as they get older in order to prevent their balance from fluctuating significantly from year to year once they retire.
Older investors typically have more bonds in their retirement accounts as a result. And 2022 was a historically bad year for bonds.