How Stock Market Drops Affect Your Retirement

Published March 2, 2018
401(k)s have become the predominant way to prepare for retirement, which leaves retirement savings exposed to market volatility. As a result, we are more sensitive to changes and drops in the markets. Knowing how stock market drops affect your retirement means it's important to protect your investments from movements in the market.
  • 401(k)s have become the predominant way to prepare for retirement, which leaves retirement savings exposed to market volatility
  • A retiree with at $1,000,000 stock market investment would lose $100,000 from a 10% drop in the markets
  • The only way to mitigate the impact of a stock market drop is to have less of a dependence on the stock market so that unanticipated drops don’t hurt quite as much

During your working years, one way to accumulate assets is by investing in the stock market. Given the rise of the 401(k), this has become the predominant way to prepare for retirement today. But, leaving our investments exposed to market volatility requires an understanding of how stock market drops affect your retirement. As a result, we are way more sensitive to movements in the stock market than pre-retirees were a generation ago.  

So, when the stock market dropped a few weeks ago, we were scared. The S&P 500 had hit a high of 2,873 on January 26th, yet over the following 10 days dropped 10% to 2,581 on February 8th. Since then the market has recovered about half of that drop.  

stock market drops affect your retirement

What Should You Do If the Market Drops?

Drops such as these can cause panic among investors. As a result, you may hear differing advice on what you should do with your current investments. Some will advise you to wait it out, others might suggest reallocating your portfolio. But in order to decide which approach is better, we need to understand what a market drop means and how a stock market drops affect your retirement. In short, if you’re planning on relying on that money for future long-term uses, such as retirement, the implications of a market drop are not good.

How Can Stock Market Drops Affect Retirement?

Let’s take 60-year-old Lenny as an example. He has $1,000,000 invested in the market for retirement. If he leaves it there for 5 more years until he retires at 65, he expects that it’ll wind up at $1,400,000 (his portfolio is returning 7%). Then he’ll take the money out of the market and start spending it. With $40,000 per year of spending, he’ll have money until age 100. (Ignoring inflation and investments in retirement for simplicity and because they somewhat cancel each other out.)

What happens to Lenny if the market drops 10% this year? Lenny will lose $100,000 immediately. Assuming his portfolio goes back to 7% returns after, he’ll retire with just shy of $1,200,000. That’s $200,000 less than he would have without the market drop!

If Lenny doesn’t want to run out of money before 100, he can no longer spend $40,000 per year in retirement. Lenny now has to reduce his spending to $35,000.

How to Protect Your Investments from Stock Market Drops 

If you are relying on money invested in the markets to provide income in retirement, stock market drops affect your retirement and are not good. They have serious implications on your standard of living and the amount of money you can spend in retirement. The only way to mitigate this risk is to have less of a dependence on the stock market so that unanticipated drops don’t hurt quite as much.

At Blueprint Income we’ve made it easy for you to lock in your stock market investments by converting them into guaranteed retirement income. You can do this on a one-off basis through standard income annuity products, or set yourself up to be able to do this easily over time with the Personal Pension. Here’s some information about both: 

Personal Pension

The Personal Pension is an income annuity account. It provides the exact same benefit as an income annuity (steady, guaranteed retirement income), but accepts smaller and flexible contributions over time and across insurers. That way you can continue investing in the stock market and benefit from upswings in the market, while building a portfolio of guaranteed income.

Here you can see what a non-stock market linked investment would look like with a Personal Pension.

You can continue with the enrollment process on your own or fill out the information to have one of our specialists follow up with you by starting with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.

Income Annuities

At Blueprint Income we offer income annuities from more than 15 of the top-rated insurance companies. Money used to purchase an income annuity is taken out of the market and transferred to an insurance company where, in turn, they guarantee you steady monthly income for life. You can buy annuities with both pre-tax retirement savings or post-tax personal savings. If you’re looking to have income start immediately, opt for an immediate annuity. Or, if you’re looking to have income start more than 2 years from now, you’ll want a longevity annuity or QLAC.

Click below to get real-time personalized quotes, where you can compare options offered from different insurers on an apples-to-apples basis.

get-a-free-online-quote-now

With this strategy — transferring some of your stock market investments into an income annuity or Personal Pension over time — you get the best of both worlds. You get to keep your principal invested in the market for potentially high returns while mitigating the impact of a market drop and allowing stock market drops affect your retirement. And, you get to start building the foundation of your retirement by locking in a guarantee of retirement income.

Interested in learning more about retirement and the Personal Pension? Sign up here to be on our newsletter.
Nimish Shukla

Nimish Shukla

Financial Planning Professional

Nimish has spoken with thousands of customers about retirement spending. As a CFA Charterholder and licensed fixed annuity producer he values the importance of building an income stream for retirement. In addition to his work at Blueprint Income he is also a regular contributor to Nerdwallet.