Investing 101

Navigating retirement savings during volatile markets

Market volatility can startle even the most experienced investors. No matter where you are on your retirement path, it’s important to keep the following in mind when deciding whether or not to remain invested. 

Key takeaways

  • 01

    Remain invested throughout market turmoil

    Staying invested can increase the possibility of greater earning, sometimes more than double that of a portfolio which misses top performing market days.

  • 02

    Maintain a long-term view with retirement savings

    Every major market decline from 1987 through 2022 in U.S. equities has reversed itself, sometimes as much as 68%, within the following year.1 This type of market trend reinforces the importance of focusing on the future as opposed to short-term disruptions.

  • 03

    Consider all possibilities before withdrawing

    For those thinking about withdrawing from retirement savings, consider: your plan’s rules, other sources of emergency funds, potential financial implications, seeking out professional advice and that unrepaid loans may be treated like income.

Investing 101

New contributions may grow after market volatility

Investors who can continue contributing to their retirement have the potential to take advantage of market recoveries. For example, those who stayed in their plan from 2007 through 2013 saw their average account balances increase by 86%.2

New contributions may grow as markets start to recover

For illustrative purposes only. Past performance does not guarantee future results.

New contributions can take advantage of potentially attractive pricing as the markets recover.

Staying invested in market downturns

Historically, market rebounds are concentrated in a few distinct spurts. We expect the market to rebound again, but we can't know exactly when that will happen.

Considerations for your investment allocation

Performance is hypothetical for the period from 3/2/2000 to 2/28/2020 and for illustrative purposes only. Past performance does not guarantee future results.

Consider the above chart, which shows the hypothetical return of $100K invested in the S&P 500 Index from March 2000 to February 2020 (yellow bar). To the right, you can see the impact of having missed top-performing days. Staying invested earned more than double that of the portfolio which missed the top 10 performing days.

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Investing tips to manage through market volatility

Here are some actions you may want to consider taking - and avoiding – when markets are volatile.

Long-term view versus short-term disruptions

Historically, stock market downturns are often followed by a period of positive market performance.

chart with 3 rows and 9 columns, showcasing the S&P 500 biggest declines with U.S stocks and the next 12 months

Source: Morningstar. Returns are principal only not including dividends. Stocks are represented by the S&P 500 Index, an unmanaged index that is generally considered representative of the U.S. stock market. Past performance is no guarantee of future results. For illustrative purposes only. It is not possible to invest directly in an index.

Every major decline from 1987 through 2022 in U.S. equities has reversed itself between 21% and 68% within the following year.

Other considerations before withdrawing retirement savings

We recognize that those who are experiencing significant and immediate financial distress may need to turn to their retirement plan for relief.

For those thinking about taking this course of action, here are some things to consider in advance:

  • Take a look at your plan's rules
    Make sure you are aware of your plan’s rules regarding loans and hardship withdrawals. If they are permitted, consider the applicable terms such as maximum amounts, eligibility criteria, and repayment terms and timing.
  • Explore other sources of emergency funds
    Consider whether it would be less costly to take a personal or equity loan, or a loan from a family member, rather than draw on your retirement savings.
  • Consider potential financial implications
    It's important to consider all the possible implications of taking a loan or withdrawal from your retirement plan. For instance, borrowing after a severe market decline may “lock in” losses, if you are not invested during a market rebound. In effect, you may be selling low and buying high.
  • Remember: Unrepaid loans may be treated like income
    If you leave your job with an unpaid loan from your retirement plan, it may be treated – and taxed – as income, potentially adding another cost. In addition, early withdrawal penalties may apply to unpaid loan balances if you are under 59 ½.
  • Seek out advice
    If you need help making a decision, you may want to consider speaking to a tax advisor, consulting with your plan sponsor or reviewing guidance from the Internal Revenue Service.
Wrap up

Frequently asked questions

  • In financial markets, volatility refers to the extent to which the price of an asset or market index changes over time. It essentially describes how much and how quickly prices fluctuate. 

  • In a volatile market, your 401(k) investment, especially those heavily in stocks, are likely to experience fluctuations. While this can cause concern, consider whether to avoid panic selling and focus on long-term strategies like diversification and continued contribution.

  • If you withdraw money from your 401(k) before age 59.5, the IRS generally assesses a 10% penalty in addition to the regular income tax on the withdrawal. The withdrawal is treated as taxable income, and you’ll pay federal income tax at your ordinary income tax rate.

Want to learn more about saving for retirement?

Saving for retirement can be complicated – but it doesn’t have to be. Arm yourself with the information you need to make the best decisions for your financial future.
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