How Stock Market Ups and Downs Affect Your Retirement Savings—and What to Do About It
The stock market is constantly fluctuating, and while its ups and downs can be unsettling, they are an expected part of long-term investing. If you’re saving for retirement, these fluctuations can impact your portfolio’s value, but understanding how they work—and how to respond—can help you stay on track toward your financial goals.
How Market Volatility Affects Your Retirement Savings
1. Short-Term Drops Can Be Unsettling, But They’re Normal
Market corrections (drops of 10% or more) and bear markets (declines of 20% or more) happen periodically, often triggered by economic concerns, geopolitical events, or investor sentiment. While it can be stressful to watch your portfolio decline in value, history shows that markets tend to recover over time. Those who panic and sell during downturns often miss out on the subsequent rebound, locking in their losses instead of benefiting from future gains.
2. Sequence of Returns Risk Matters
The order in which you experience market gains and losses is especially critical in retirement. If a major downturn occurs early in your retirement while you are making withdrawals, you may end up depleting your savings faster than expected, leaving less money to recover when the market rebounds. This is why it’s important to have a well-thought-out withdrawal strategy and a portfolio that balances growth with stability, especially as you transition into retirement.
3. Growth Potential in Bull Markets
On the flip side, stock market rallies and extended bull markets can significantly boost your retirement savings. Over time, equities have historically provided strong returns, often outpacing inflation and helping long-term investors build substantial wealth. The key is staying invested during market upswings to fully capture their benefits. Those who try to time the market often miss out on some of the best-performing days, which can have a huge impact on long-term returns.
Steps to Protect Your Retirement Savings
1. Diversify Your Investments
A well-diversified portfolio spreads your money across different asset classes, such as stocks, bonds, real estate, and cash, reducing your overall risk. When one asset class is down, another may be stable or performing well, helping to smooth out returns over time. Diversification can also include investing across different industries, geographic regions, and investment styles, ensuring that your portfolio isn’t overly dependent on any single area of the market.
2. Maintain a Long-Term Perspective
One of the biggest mistakes investors make is reacting emotionally to short-term market movements. Selling investments during downturns locks in losses, while trying to jump back in at the right time is nearly impossible. A long-term mindset means focusing on your investment strategy rather than daily headlines, understanding that markets move in cycles, and trusting that a well-structured portfolio will provide growth over decades, not just days or months.
3. Adjust Asset Allocation as You Near Retirement
As retirement approaches, gradually shifting a portion of your portfolio from stocks to more stable investments like bonds, dividend-paying stocks, or cash equivalents can help reduce risk. This strategy, known as "de-risking," helps protect your savings from major market swings at a time when you may not have the luxury of waiting years for a recovery. Many financial professionals recommend a glide path approach, where you slowly decrease stock exposure and increase fixed-income assets as you get closer to retirement.
4. Keep an Emergency Fund
Having an emergency fund outside of your retirement accounts can provide a financial cushion during market downturns, preventing you from having to sell investments at a loss to cover unexpected expenses. A general rule of thumb is to keep 6 to 12 months’ worth of living expenses in a high-yield savings account or other liquid, low-risk account. This buffer can give you peace of mind and financial stability, especially during uncertain economic times.
5. Consider a Withdrawal Strategy
A strategic withdrawal plan can help ensure your retirement savings last throughout your lifetime. The 4% rule—where you withdraw 4% of your portfolio annually—is a common approach, but it may need to be adjusted based on market conditions, inflation, and personal circumstances. In years when the market is down, withdrawing less or relying on cash reserves instead of selling investments can help preserve your portfolio’s value. Some retirees also use a bucket strategy, dividing assets into short-, mid-, and long-term investments to provide stability while allowing for growth.
6. Continue Contributing During Market Lows
If you’re still working and saving for retirement, keep investing during market downturns rather than pulling back. When stock prices fall, your contributions buy more shares, a strategy known as “dollar-cost averaging.” Over time, this can lead to significant growth when the market rebounds. Even if market conditions seem uncertain, consistently contributing to retirement accounts like a 401(k) or IRA ensures that you’re taking advantage of lower prices and compounding growth.
Final Thoughts
Market volatility is an unavoidable part of investing, but by diversifying, maintaining a long-term perspective, and following a sound withdrawal strategy, you can help ensure that your retirement savings stay on track. Whether you’re in the accumulation phase or preparing to retire, staying disciplined and making informed adjustments can provide financial security and peace of mind—no matter what the market does. If you’re unsure whether your portfolio is positioned correctly, consulting a financial advisor can help tailor an investment strategy that aligns with your goals and risk tolerance.
Disclosure
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov.
Past performance is not a guarantee of future results.