Retirement destroyed, savings lost, 401k plans wiped out?
COVID-19 be damned, the numbers of 401k millionaires are back up near record highs according to the latest data from Fidelity Investments. An incredibly strong second quarter for the stock market translated to big rebound gains for 401k accounts, with Fidelity reporting the number of individuals with 401k plan balances of $1 million or more in plans where Fidelity is recordkeeper spiking 49% compared to the end of the first quarter to land at 224,000.
The ranks of 401k millionaires have gone up and down like a yo-yo lately, with the all-time high of 233,000 being hit at the end of Q4 2019 before plunging back to 150,000 during the first quarter of 2020 as the pandemic hit. A year ago, Fidelity showed 196,000 401k millionaires at the end of Q2.
The big jump in millionaire ranks this second quarter can obviously be attributed to the surprisingly strong rally by the stock market during that timeframe. Wall Street experienced its best quarter since 1998 between the beginning of April and the end of June, with the S&P 500 gaining nearly 20% to counter the coronavirus-fueled 20% drop suffered in the first three months of the year, the market’s worst quarter since the 2008 financial crisis.
Source: 401k Millionaire Ranks Rebound in Q2 – 401K Specialist
I have been retired almost 3 years now and I am showing similar results. I did post a loss in 2018 but I am now averaging about 12% across all my funds for the long term average. My retirement planning is based on withdrawing using the 4% rule so I hope to average year over year more than 5% so that the fund keeps growing with inflation. Stock brokers used to say that the historic return was 8% over time. I never saw that during the 2000’s. Fidelity Investments in 2018 or 2019 stated that a good proper mix of cash, bonds, and stocks would return 5.29%. At the time, that was what I was making in my combined portfolios.
I did learn three things about 401k statements.
1) stop looking at the statements with the rolling averages. They are so misleading when you are actively contributing. I always felt like I was losing money. I know I make contribution but my balance was less that before I made it. I made my own excel spreadsheet and started looking what I was doing January 1st to January 1st. Some years, I did lose money and the next year I make twice as much. What you couldn’t process was that in one quarter you made enough money that covered all the other losses for that year because the keep looking back the prior year or 5 year or some other useless period. Meanwhile you only remember that the last quarter you lost money again.
2) I never hit the stock market historical averages while contributing. I think this was because my contributions were being purchased automatically each week and that I was essentially buying high during some weeks resulting in suppressed return numbers. Once I stopped making contributions, I then started getting above the historical return averages on my statements. Since I really didn’t have control over when the fund purchased shares, the short term view was horrible. Now the long term view looks great.
3) It took me a long time to stop looking at the dollar amount of losses and start paying attention to percentages. When first contributing $100 a week and you lose $500 in a quarter, you want to panic. When you have $100k in your portfolio and lose $2k, you want to get out. You lost 20 weeks of contributions, right? But that was only 2%. One quarter you might be up 10% and the next -3%. That is why I went to January 1st of every year, a much longer view and you usually are down only one year and then you are up for 3, 4 or more years at a time. If you are lucky enough to get 7 figures in 401K, a 5% loss is like losing the price of a new car and in six month you might have made it all back to buy a second car too. The dollar amount swings day to day are huge but the percent swings are still the same as back in the days of $100 contributions. Once you get over the panic, it becomes fun watching the market swings. Did did I win a boat today or lose the farm today. Some nights you drink beer when you lose, others nights you get to drink champagne. I don’t panic sell and in a few days the opposite will happen. And it happens all year long, year after year and my 401K keeps growing in the end.
I would be very hesitant to base my retirement plan on anything that the stock market is doing lately. The FED money printing/low interest rate regime has left investors with nowhere else to put money and the covid lockdowns has spawned a new batch of know nothing day traders. Of course the equity markets are booming. It’s just a question of how long it lasts.
But isn’t that what we all do one way or the other, even with a pension. The last contribution I made to my 401k was December 2009 and then I retired. I have made five RMDs and my 401k balance as of today is over 50% higher than it was on 12/31/09 and that’s with 60% with stable value and other bonds. Yes, there will be a correction as there always is, but …what choice is there for retirement investing?
I really have no choice but to have faith in the stock market. Saving accounts interest is in the gutter. My best saving account rate is 0.8% but one is also 0.03% which only has enough money to cover a check from that bank. My CD’s rates are not much better when they are rolling over.
12 month inflation was reported this month at 1.0%.
I have recovered all my losses for this year and I am earning 1.8% as of yesterday. Will I see large swings in my 401k, yes. But until I am headed for that nursing home, I still need my money to grow more than inflation overwise I might as well bury it in the backyard. I have enough money in cash, CDs, bonds to last a few years, the rest is in index funds. The only time in the last 33 years that the market lost money for more than one year in a row was 2001, 2002, & 2003. So until I can’t risking a 3 year loss, then I”ll reduce my exposure in the markets.
The ten year annual return for my 401k index large, mid cap and small cap mutual funds was between 11.2 and 13.7%