Lessons From Americans’ Dour Retirement Outlooks

Bear markets can have a scarring effect on investors’ psyches, and it seems last year’s downturn was no different—at least if a recent survey of US retirement plan participants is any indication. A headline finding: Just 56% think they are on track to reach their desired retirement lifestyle, the lowest share since the survey began 8 years ago. Feelings tend to follow market movement, so these results aren’t surprising in the wake of last year’s bear market—especially with the backdrop of high inflation. Yet from a personal finance perspective, this survey captured a couple themes we think are worth highlighting.

The Need for Long-Term Growth

Blackrock’s “Read on Retirement” survey reaches out to defined contribution plan sponsors, workplace savers, independent savers and retirees. These responses reflect a spectrum of experience, from the Baby Boomer generation to “Gen Z” (those born from the mid- to late-1990s to the early 2010s), though the survey doesn’t provide a detailed demographic breakdown of the 2600 respondents currently saving for retirement. The latest poll of workplace savers found 29% now expect to retire later than planned due to economic concerns—and just 21% are “very confident” they will have enough money to last through retirement. The reasons behind the grim outlook: market volatility and high inflation.

It is natural for recent experience to cloud many investors’ expectations. It is textbook recency bias, an innate behavioral tendency. But as challenging as the past couple years have been, downturns shouldn’t automatically throw investors’ retirement goals off track provided they are positioned to reap the recovery. The S&P 500 has averaged 10% annualized growth since 1925—a figure that includes bear markets.^[i] Now, that doesn’t mean bull market years are always smooth and up big. Rather, the longer you are invested, the more opportunity you have for compound growth to work for you as bull markets (typically) run longer and stronger than bear markets.

Compound growth benefits investors of all ages. Yes, retirement is likely more top of mind for a Boomer decades into their career than a Gen Z worker who just entered the labor force. But many investors, including those close to retirement, require long-term growth, as they need their money to work for them through their golden years—and perhaps beyond, if the purpose for their money stretches through and after their lifetime. Having a long time horizon gives stocks more time to erase bear markets’ declines and work toward an investor’s long-term goals. Therefore, the feeling of being ill-prepared for retirement, for disciplined investors, may not match reality. 

All investors must also contend with inflation, which eats into purchasing power over time. Last year’s 8.0% annual inflation rate was an extreme example historically.^[ii] But the median annual CPI inflation was 2.4% over the past 30 years—so most investors need some growth, if only to combat eroding purchasing power.^[iii] Including stocks in your portfolio mix and staying disciplined with investments, cash flow and saving can increase the odds you get growth outpacing inflation over time.

The Mistake of Emotional Selling

Not that discipline is easy. The survey reported about one-third of workplace savers admitted they sell their investments during “periods of market downturn.” Exiting stocks early on in a downturn can prove beneficial, providing you get back in later and lower than you exited. But getting out late in a downturn? While it may bring some short-term emotional relief, doing so can lead to a couple problems, in our view. Besides turning paper losses into actual losses, staying on the sidelines and not participating in the bull market recovery can weigh on the aforementioned long-term compound growth. As we wrote in February, missing a bull market’s early rebound can be more costly than enduring late bear market drops.

We aren’t piling on those who did sell out of emotion. Long-term investing isn’t easy, and there is a reason Fisher Investments founder and Executive Chairman Ken Fisher calls the market “The Great Humiliator.” But it is a lesson worth internalizing for the future.

On the Desire for “Guaranteed Income”

Due to volatility and inflation, the survey reported savers are “searching for certainty,” with 89% saying a guaranteed retirement income would positively impact their well-being. We understand the desire for reassurance, but so-called “guaranteed income products” usually cut into returns with fees and fine print in exchange for the perceived security, and many of them offer little to guard against inflation without added costs.

In our view, the strong desire for these kinds of products now is a sign of “breakevenitis,” which refers to investors’ urge to sell stocks when recoveries near their prior high. The logic behind this psychological phenomenon: Investors didn’t exit near the low and now have an opportunity to get out before markets fall again. But what it actually means in practice—especially if people opt for pricey products—is forsaking long-term market-like returns for something that limits upside and/or whose costs may not be worth the benefits. The opportunity cost is high, especially if stocks keep rising. With very few exceptions, stocks have pretty quickly recaptured their prior highs after bear markets and kept rising a long while. Breakevenitis essentially tempts people away from this, potentially leading to a greater risk of not reaching their retirement goals.

Recent history shows how quickly stocks can rebound. After the COVID-driven bear in early 2020, the S&P 500 reached breakeven by August—and the bull market continued for another 16 months.^[iv] Following the 2007 – 2009 bear market, a recovery began in March 2009, the S&P 500 hit breakeven in April 2012—and the bull market lasted for nearly eight more years.^[v] Today, the S&P 500 is quite close to its January 2022 high. Market-like returns have historically been a pretty good way to support cash flow needs in retirement. The hard part is being patient and disciplined enough to reap them.