The past couple of years have been challenging for almost everyone invested in stocks or bonds, including anyone saving for retirement through employer-sponsored plans. With markets down across the board and historic inflation squeezing American paychecks by driving up the price of rents and groceries, Americans are dealing with financial issues we haven’t 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 in a broader context. I encourage retirement savers to keep these themes in mind as we turn the page toward 2023.
According to John Hancock data, one in four (25%) of retirement savers assessed said that 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 the headlines and feeling them in your wallet, if you’re not careful, stress can cloud your judgment and even take a toll on your health.
Taking stock of what you can control, and what you cannot, can help you gain perspective so you can focus on what’s within your power. For retirement savers, that means continuing to save in your retirement account and making sure you’re contributing enough to get the full employer match, if it’s offered. Setting a household 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, regardless of what the market and economy are doing.
A portfolio made up of 60% stocks and 40% bonds is generally considered well balanced. And although that portfolio mix is having a rough year in 2022, in the broader history of the market this year has been an anomaly. The year 1931 is generally considered to be the worst year for a balanced 60/40 portfolio, when it lost just over 36% of its value. Other than 1931 though, losses exceeding 20% in one year are pretty rare.
That may be little solace if you’re watching your account go down and worrying if you need to scale back your spending plans for retirement or continue working for longer than you wanted. Even though a balanced portfolio is likely to lose more than 20% in 2022, there is a silver lining.
In the five years that follow a balanced portfolio losing more than 20%, that same mix historically generated annualized returns of 13%. This potential for a rebound is a reminder why it’s important to stay in the market and continue making contributions 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 was 10 years ago. The amount workers 50 and older can make in catch-up contributions increased by $1,000 to $7,500. See what you can do to maximize your retirement savings in 2023. And because contributing to a 401(k) plan lowers the wages reported by your employer, you may be able to lower your taxable income.
As you’re sitting down to make your household budget for 2023, see if you can identify unnecessary expenses that you can cut to help you save as close to that $22,500 number as possible.
The average age of the American worker is 41.7, according to the Bureau of Labor Statistics. Assuming a retirement age of 65, that means that most folks are just around the midpoint of their career and therefore have plenty of time to recoup their portfolio’s losses from 2022.
To rebound from this year’s losses and grow your retirement nest egg requires a persistent focus on saving in your retirement account. Withdrawing funds from your 401(k) prematurely to cover other expenses or stopping contributions might seem like good short-term solutions, but both actions will make it harder to meet your long-term retirement savings goals.
Getting ahead of 2023
This will likely go down as one of the worst years of investment performance for people saving for retirement. But don’t let that derail all the hard work you’ve done saving for retirement thus far. Instead, think about these four numbers and take stock of your overall financial picture, refine your monthly budget, and consider making any financial moves that would be beneficial before the end of the year. Taking control can help you to feel more confident about your finances as you’re ringing in 2023.
Lynda Abend is head of strategy and transformation, John Hancock Retirement.
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