How to Bounce Back From a Retirement Savings Setback

Early in 2020, we officially entered a bear market and a recession. This double whammy, occurring after the longest bull market and economic expansion in US history, has left many Americans feeling unsure about their future retirement plans.

But if you’re a decade or more away from retirement, your portfolio should have plenty of time to recover. After all, bear markets in the past 70 years lingered for an average of 14 months and have always been followed by a bull market – typically lasting six years.¹

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The first step toward recovery? Stay confident knowing that you may be able to get your retirement savings back on track with these six reliable strategies.

Revisit your Allocation

How you respond to market downturns is a good gauge of your risk tolerance and whether your asset allocation – the percentage of stocks to bonds and cash in your portfolio – is appropriate for you. If you’re losing sleep over market swings, for example, that’s a sign you may be investing too heavily in stocks.^*

Yet, many people invest in stocks for the potential growth they may provide, as they pursue their retirement goals. So, to determine the right proportion of stock for your portfolio, consider one common approach that can help you identify a general range based on your age.

First, subtract your current age from 100. That will give you the bottom of the range. Next, subtract your age from 120 to find the top end. For example, a 55-year-old’s portfolio might hold 45% to 65% in stock, while a 40-year-old might invest as much as 60% to 80% in stock.^**

Rebalance to Achieve the Right Mix

Over time, you may need to adjust your portfolio’s asset allocation if one asset class outperforms another. A good rule of thumb is to review your asset allocation once or twice a year, and if the allocations have drifted five percentage points or more off target, then consider rebalancing.

For example, let’s say you originally decided you wanted your portfolio to include 60% in stocks and 40% in bonds. However, during a periodic review, you realize the value of those investments has shifted, and you now hold 53% in stocks and 47% in bonds. To rebalance, you’ll need to move money from bonds to stocks, so you can return to a 60-40 split.^**

Avoid Timing the Market

It may be tempting to put saving for retirement on pause when the stock market plunges. But if you sit on the sidelines trying to avoid the worst days in the market, chances are you’ll miss out on the best days, too.

Consider this historical situation: If you invested $10,000 in the S&P 500 index at the end of 2004 and stayed fully invested, your account would have grown to $36,418 in 15 years.² But if you missed 10 of the market’s best days during that time because you exited the market, your balance would amount to only $18,358. And if you missed 30 of the best days, you would have lost money – with the balance dipping to $8,150. While past performance doesn’t predict or guarantee future results, just missing a few of the best days in a market recovery could prove quite expensive!

A better move for long-term investors? Take the emotion out of investing and avoid guessing about the best time to jump in the market by using dollar-cost-averaging. With this strategy, you make regular, equal investments over time – no matter what the market is doing. You’ll end up buying more shares at a lower price, and fewer shares when they’re at a higher price. This doesn’t guarantee you’ll profit or avoid any losses, but dollar cost averaging can help even out the average price you pay per share over time and take the guesswork out of your strategy.

Increase Your Emergency Fund

Having dedicated savings for emergencies – such as job loss or medical bills – can help you avoid dipping into retirement savings for life’s unpleasant surprises. During market downturns, it’s especially important to have cash or cash equivalents available, so you aren’t forced to sell assets that have lost value.

How much is enough? Most experts recommend having three- to six-months’ worth of living expenses on hand. And people who hope to retire within a year or so may want to stockpile even more (in case a downturn occurs right before or right after they retire).

If your current fund falls short of your goals, move small amounts each pay period into an interest-bearing account until you reach your target. To build savings faster, review your budget to see if there are expenses you can trim. Then, redirect those savings into your emergency fund.

Consider a Roth IRA Conversion

A Roth IRA has some big advantages over a traditional IRA. For instance, a Roth is funded with money that’s already been taxed, but qualified withdrawals are tax free in retirement. And a Roth isn’t subject to required minimum distributions after age 72, so your money has the opportunity to grow in the account.

You can transfer assets from a traditional IRA to a Roth – although you will owe income taxes on any untaxed funds you convert. But now may be a tax-wise time to do so. Income tax rates remain low, at least through 2025. And if the value of the traditional IRA account has fallen along with the stock market, your tax bill will be lower, too. Be sure to consult with your tax advisor to discuss how a Roth IRA conversion might impact your tax situation withdrawal availability and your other retirement accounts.

Boost Retirement Contributions

Because of the recession, some employers have started to suspend or reduce contributions they make to workers’ retirement accounts.³ If that happens to you, boost your contributions – if you can afford it – to make up the difference until your employer reinstates the match.

Or, plan to restore any early withdrawals you took from retirement accounts under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The law allows investors under the age of 59½ to take up to a $100,000 coronavirus-related hardship distribution in 2020 from an IRA, 401(k) or similar play without triggering the 10% early withdrawal penalty.

Income tax on the distribution can be stretched over three years instead of paying it all in one year, and the law also gives you three years to restore an early distribution and recoup taxes paid.⁴ By repaying the money, it will again be invested, and you won’t miss out on any future gains.

As a final step, assess your progress with our “Are my current retirement savings sufficient?” calculator.

^* Asset Allocation seeks to maximize the performance of your investment portfolio using diversification and disciplined investing. Diversification can be thought of as spreading your investment dollars into various asset classes to add balance to your portfolio. Although using an asset allocation methodology does not guarantee greater returns or against the risk of loss in a declining market, it may be able to reduce the volatility of your portfolio.

^** This is not a recommendation to buy or sell securities, or of any particular asset allocation strategy. These investment guidelines are not intended to represent investment advice that is appropriate for all investors. Each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Please discuss with your financial advisor before implementing an investment plan.

¹ U.S. Midyear Outlook: From recession to recovery. Capital Group, June 4, 2020.

² Time, not timing, is the best way to capitalize on stock market gains. Putnam Investments, 2020.

³ Amid COVID-19, more employers are easing access to 401(k)s than cutting matching contributions. Willis Towers Watson, May 4, 2020.

⁴ Coronavirus-related relief for retirement plans and IRAs questions and answers, IRS.gov, May 4, 2020. Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice. Consult a qualified professional regarding your specific situation.

Registered representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment advisor representatives offer advisory services through Mutual of Omaha Investor Services, Inc. Not all Mutual of Omaha Advisors representatives are financial advisors. Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

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