Retirement savers lose more than $3 trillion in stock market decline

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As stocks tumble this year, billions of dollars have been squeezed out of Americans’ retirement savings.

This year, the S&P 500 has fallen more than 20%, the Dow Jones Industrial Average has fallen nearly 16%, and the Nasdaq Composite has fallen more than 28%. As a result, Americans lost $1.4 trillion in their 401(k) accounts and another $2 trillion in IRAs, according to Alicia Munnell, director of Boston College’s Center for Retirement Research.

While the losses mostly sting after the 2021 star run, Munnell says most Americans still have plenty of time to recover before exploiting those accounts.

“Personally, I feel like I didn’t expect the gains in 2021… In some ways, we’ve just lost those windfall gains and are putting us back to where we were before all this excitement started,” she told Yahoo Money. “In this sense, it is not then wrong.”

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 13, 2022. REUTERS/Brendan McDermid

Last year, nearly two-thirds of all 401(k) funds it manages were held in stocks, according to mutual fund firm Vanguard’s new report, “How America Saves 2022.”

Holding tons of stocks in retirement accounts was nice while it lasted. The S&P 500 climbed 26.89% in 2021. The Dow and Nasdaq also posted gains of 18.73% and 21.39% for the year, respectively.

Result: The average total and personal returns for pension plan participants were 14.6% and 13.6%, respectively, for the one-year period ended December 31, 2021, according to the Vanguard report.

But for someone in the 45-54 age bracket, whose median account balance was around $61,500 last year, “assuming 72% of that is in stocks and stocks are down about 20%, that means they would have lost about $8,860 so far this year,” according to Munnell’s analysis of Vanguard data.

How much stock is too much?

In 2021, under-34 pension plan asset allocation was 88% equity; for savers aged 50 to 54 which dropped to 71%; for near-retirees aged 60 to 64, it was 57%; and for those over 70, it was 43%.

“I was actually surprised at the large amount of assets that people have in stocks,” Munnell said. “At least in Vanguard, I mean having over 70% of your assets in stocks is a lot in your 50s. And it showed that even people approaching retirement had almost half of their assets in shares.

Why have retirement savers invested so much in stocks? Largely because of target date funds, which “maintain a substantial amount of equity investment,” Munnell said.

Display of stock quotes.  Stock Exchange Council.  LED digital display effect.  Vector illustration.

Display of stock quotes. Stock Exchange Council. LED digital display effect. Vector illustration.

Алексей Белозерский via Getty Images

According to the report, 95% of plans offered target date funds by the end of 2021, up from 84% in 2012. Eighty-one percent of all Vanguard participants used target date funds and 69% of participants with target date funds had their entire account invested in a single target date fund.

As a result, all pension plan participants, regardless of income level, had just over three-quarters of their average account balance allocated to equities in 2021; at the median, participants allocated 87% to stocks, according to the report.

All income levels have similar stock market risk

In the past, higher-income participants tended to take on slightly more stock market risk, on average, than lower-income participants, the report found. However, with the growing adoption of target date funds and auto-enrollment, participants in all income segments have similar equity risk.

In fact, the median pension plan member earning $50,000 a year had 87% of their account invested in stocks, compared to 85% for those earning more than $150,000.

Stocks come with an expected higher return and increased risk. But having a percentage of assets in stocks isn’t necessarily a bad thing, of course, even with market chaos.

“As you approach retirement, you’ll likely have a life expectancy of over 20 years,” Munnell said. “It’s a long time to recoup losses. And it wouldn’t make sense to reach zero equity balances at age 65 and give up all that return. But if you’re nearing retirement and need to withdraw that money, then you’re stuck here.

Retirees bear the brunt of the decline

Those most affected are retirees who, by law, are required to take minimum distributions from their tax-deferred retirement accounts in the year they turn 70 and a half.

“This year, that may involve selling stocks at a loss,” Munnell said.

“Young people don’t mind at all, because they have years for the market to bounce back,” she says. “And even most people nearing retirement can wait.”

The other thing to remember is that people with these 401(k) plans and these IRA accounts are basically the top third of the population in terms of income, Munnell said, “so it’s something that affects the highest paid , not the lowest paid.”

If the decline stops now, then “people shouldn’t be this upset,” she said.

“If it goes any further, it’s worrying, especially if you have to use the money,” she said. “If you don’t need to use the money, then don’t look.”

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Kerry is a senior columnist and senior reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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