There are many unique challenges facing the current generation of retirees including higher medical costs and longevity. Perhaps the biggest challenge is the lack of a pension. Years ago most private sector employers made the shift to defined contribution plans (e.g. 401(k)) from defined benefit plans (e.g. pension). This put more of the savings onus on the employees plus the additional challenge of managing your income in retirement.
Let’s say you were disciplined in your savings throughout the years and put away 7% of your salary (making $50,000/year) and your employer matched another 3% (average employer contribution). At the end of 35 years you would have $861,584 saved assuming an 8% average annual return.
Now it comes time to retire and you have to decide on what to do with your money. CD rates are still earning less than inflation so this money probably needs to be invested in some way in order to generate enough income and last for your lifetime.
So far all is right with the world, especially when we have a year like 2017. The stock market was up 22% and there was little volatility. In 2017 there were less than 10 days where the market was up or down by 1% or more.
Fast forward to today. As of April 6th there have been over 20 days the market has broken the +/- 1% barrier. While this pace is ahead of normal market volatility, the last 20 years was closer to the norm than 2017 was. On Friday, April 6th the S&P 500 was down 2.19%. If your retirement savings was all in stocks that would mean your $861,584 account lost $18,869 in value in one day.
This is where our emotions take over and we start doing things that feel right but have long-term detrimental effects. When someone sees a loss of $18,869 they start to think that they just lost their first house down payment in a day. They also come to the realization that no more money is being saved, this is all they have, and go into protection mode (i.e. get out of the market).
We all know that trying to time the market is a long-term losing proposition, so in today’s environment with increased volatility it is doubly important to have a sound, disciplined approach to investing your retirement savings in addition to a withdrawal strategy.
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