Retirement savers lose over $3 trillion in stock market retreat

As stocks somersault this year, trillions of dollars have been scrubbed from Americans’ retirement savings.

This year, the S&P 500 has slumped over 20%, the Dow Jones Industrial Average has fallen close to 16%, and the Nasdaq Composite has dropped 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 the Center for Retirement Research at Boston College.

While the losses sting especially after the stellar run-up in 2021, Munnell says most Americans still have enough time to recover before they tap those accounts.

“I personally feel like I never expected the gains in 2021… In some ways we've just lost those unexpected gains and puts us back out to where we were before all this excitement started,” she told Yahoo Money. “In that sense, it's not so bad.”

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

Holding gobs of equities in retirement accounts was sweet while it lasted. The S&P 500 climbed 26.89% in 2021. The Dow and Nasdaq also scored gains of 18.73% and 21.39% for the year, respectively.

The result: average total and personal returns for retirement 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 somebody in the 45-to-54 age group, whose median account balance was roughly $61,500 last year, “assuming that 72% of that's in equities, and equities are down about 20% that means that they would have lost about $8,860 so far this year,” according to Munnell’s analysis of the Vanguard data.

How much stock is too much?

In 2021, retirement plan asset allocation for those under age 34 consisted of 88% in stocks; for savers ages 50 to 54 that dropped to 71%; for near retirees ages 60 to 64, it was 57%; and for those over 70, it was 43%.

“I was actually surprised at what a large share of assets people have in equities,” Munnell said. “At least in Vanguard, I mean having more than 70% of your assets in equities is quite a lot in your 50s. And it showed that even people approaching retirement had almost half their assets in equities.”

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

Ninety-five percent of plans offered target-date funds at year-end 2021, up from 84% in 2012, according to the report. Eighty-one percent of all Vanguard participants used target-date funds and 69% of participants owning target-date funds had their entire account invested in a single target-date fund.

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

All income levels have similar equity risk

In the past, higher-income participants tended to assume somewhat more equity market risk, on average, than lower-income participants, according to the report. However, with the rising adoption of target-date funds and automatic enrollment, participants of all income segments have similar equity risk.

In fact, the median retirement plan participant earning $50,000 annually had 87% of their account invested in equities compared with 85% for those earning over $150,000.

Equities come with expected higher return and more risk. But having a percentage of assets in stocks is not necessarily a bad thing, of course, even with the market mayhem.

“As you approach retirement, you probably will have a longer life expectancy than 20 years,” Munnell said. “That's a long period over which to recoup losses. And it wouldn't make sense to go to zero equity balances at 65 and give up all that return. But if you're approaching retirement and you need to take that money out, then you get squeezed here.”

Retirees bear the brunt of the drop

The people who are most affected are retirees who by law are required to take minimum distributions from their tax-deferred retirement accounts now the year they turn 72.

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

“Young people, it doesn't bother at all, because they have years to have the market bounce back,” she said. “And even most people approaching retirement can wait this out.”

The other thing to remember is that people with these 401(k)plans and IRA accounts are basically the top third of the population in terms of earning, Munnell said, “so this is something that affects the higher paid, not the lower paid.”

If the declines stop now, then “people shouldn't be that upset,” she said.

“If it goes further, it's worrisome, particularly if you have to use the money,” she said. “If you don't have to use the money, then just don't look.”

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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