The last couple of years have been tough for just about everyone who invests in stocks or bonds, including anyone who’s been saving for retirement through employer-sponsored plans. With markets falling across the board and historic inflation squeezing American wages by driving up the price of rents and groceries, Americans are dealing with financial woes not seen in a generation.
When financial times are tough, it can be hard to remember that markets have always fluctuated and economic conditions are cyclical. As we look ahead, there are four numbers that can help put recent economic conditions into a broader context. I encourage retirees to keep these themes in mind as we move forward into 2023.
According to data from John Hancock, one in four (25%) of retirees assessed said their finances often caused them stress in the third quarter of this year. That number is up from 18% in the first quarter, a substantial increase. While it’s natural to be stressed when you see rising inflation and falling markets in stocks and feel them in your portfolio, if you’re not careful, stress can cloud your judgment and even take a toll on your health.
Taking stock of what you can and cannot control can help you gain perspective so you can focus on what is within your power. For retirement savers, that means continuing to save into your retirement account and making sure you’re contributing enough to get a full employer match, if offered. Establishing a family budget, building an emergency fund, and understanding your investments and risk tolerance are all good steps to take to help you feel more empowered in your financial decision-making, no matter what the market and economy is up to. .
A portfolio that is 60% stocks and 40% bonds is generally considered well balanced. And while that portfolio mix is having a tough year in 2022, in the broader market story this year has been an anomaly. The year 1931 is generally considered the worst year for a 60/40 balanced portfolio, when it lost just over 36% of its value. Other than 1931, however, losses of more than 20% in one year are quite rare.
It might be a small comfort if you’re watching your account go down and worry about whether you need to scale back your retirement spending plans or keep working longer than you intended to. While a balanced portfolio is likely to lose more than 20% in 2022, there is a silver lining.
In the five years following a balanced portfolio losing more than 20%, that same mix has historically generated annualized returns of 13%. This rebound potential reminds us why it’s important to stay in the market and continue to contribute while funds are at lower values.
The 2023 401(k) contribution limit is $22,500 per individual, an unprecedented increase of $2,000 more than last year and $5,000 more than the limit 10 years ago. The amount that workers age 50 and older can pay in recovery contributions has increased by $1,000 to $7,500. Find out what you can do to maximize your retirement savings in 2023. And because contributing to a 401(k) plan reduces your employer’s reported wages, you may be able to reduce your taxable income.
As you sit down to establish your household budget for 2023, see if you can identify unnecessary expenses you can cut to help you save as close to that $22,500 number as possible.
The median age of the American worker is 41.7, according to the Bureau of Labor Statistics. Assuming a retirement age of 65, this means that most people are just in the middle of their careers and therefore have plenty of time to recover their portfolio losses from 2022.
Recovering from this year’s losses and growing your retirement nest egg requires constant attention to the savings in your retirement account. Withdrawing funds from your 401(k) prematurely to cover other expenses or stop contributions might seem like a good short-term fix, but either action will make it harder to meet your long-term retirement savings goals.
Ahead of 2023
This will likely become one of the worst investment performance years for people saving for retirement. But don’t let that derail all the hard work you’ve put in saving for retirement thus far. Instead, think about these four numbers and take stock of your overall financial picture, sharpen your monthly budget, and consider making any financial moves that would be beneficial before the end of the year. Taking control can help you feel more confident about your finances as you ring into 2023.
Lynda Abend leads strategy and transformation, John Hancock Retirement.
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