As the coronavirus pandemic rages on, many people have lost their jobs. Others have been furloughed, and some businesses have been forced to close. According to a survey from Nationwide Retirement Institute, about one in three Americans are concerned that they might lose their life savings. The survey looked at more than 2,000 adults in the United States. However, you don’t need to worry about losing your retirement savings. Here’s why.
For long-term investments, such as retirement accounts, you don’t have to panic. Even though the S&P 500 index dropped by around 30 percent during the early part of the pandemic, the market is getting better now.
Of course, it will take some time for the stock market to completely recover. The Dow Jones Industrial Index is performing better than it did in April, but its index is still down by 12 percent this year. For 2020, the S&P 500 has dropped by 7.4 percent. The Nasdaq has risen by 4 percent.
Even if the markets are going down because of the pandemic, people are still saving for retirement plans sponsored by their employers. The Investment Company Institute has released data showing that the savings for retirement have not dropped historically as much as general markets.
For instance, consider the year 2000, when the dot-com boom burst. When that happened, the S&P dropped 31 percent between the end of 1999 and October 2002. Although that was a big drop, balances in 401(k) accounts only dropped by 8 percent. They then went on to completely recover.
Consider the financial recession in 2008, as well. During that time, the S&P dropped 37 percent between the end of 2007 and March 2009. Retirement accounts like 401(k)s dropped by around 26 percent, but then they rebounded. With both examples, retirement accounts did better than the general market. Later, retirement accounts went up.
Part of the reason for this is because many retirement plans have balanced and diversified investments in them. They don’t just have higher-paying investments, like stocks. They also have real estate and bonds, among other classes of investments.
When your portfolio is balanced, you are spreading the money out among many different areas, which reduces the risk overall. That also allows you to access assets that might do better than stocks some of the time. Just because a stock did well in the past does not mean it will do so again in the future.
In the past economic downturns, individuals’ account balances went down. But it didn’t take long for most investors to recoup their losses. In the long run, stocks almost always do well.
Another reason that retirement plans still do well during economic downturns is that people still invest. Many people have automatic deductions from their paychecks toward their 401(k) plans. As long as they are still employed, they will likely not stop that.
This has remained true even during the coronavirus pandemic. Around 49 percent of Americans, both unemployed and working, are still contributing that amount to their plans, according to a new survey. Around 18 percent are not contributing as much to their accounts.
Making the Right Decision
When you are deciding what to do in regard to the coronavirus pandemic, keep your financial goals in mind. It’s likely that you will not touch your retirement savings for a while yet. Even once you need the money to live on, you will probably need it for the next 20 to 30 years.
Although the coronavirus pandemic might cause short-term changes in the stock market, your long-term finances probably will not change that much. That means you should avoid making any hasty decisions. Your funds will likely be safe during the pandemic, but a poor decision now could affect you years down the road.
It is also important to have a financial and retirement plan developed. This way you can track how you are doing and run what-if scenarios on what might happen to your portfolio and plan if there is another severe market downturn. There are great retirement planning applications on the market that allow consumers to create a plan on their own. We have found the two best are WealthTrace and Personal Capital. Both allow you to create your own detailed retirement plan, but WealthTrace is the more detailed software with the ability to run lots of what-if scenarios.
When it comes to retirement savings, the system has a lot of give, even during financially hard times. No matter what the market is doing, people tend to keep contributing to their accounts. That means that even if you see your account balance go down, you can expect it to go back up once things are back to normal. The important thing is to not let fear take over and cause you to make a poor decision.