Your most common questions about stock market volatility and retirement savings

It can be frustrating when something out of your control causes the value in your retirement savings to waver. To counter that frustration, you may feel you need to do something—like take money out of your retirement accounts. There’s a reason not to do that, though, and it’s called abandonment risk.

Abandonment risk simply refers to the possible negative impact to your retirement savings should you stop contributions or make withdrawals from your retirement savings. If you choose to exit during a downturn, you may lose the potential for growth, decrease your overall savings, and ultimately put your long-term goals at risk.

So what can you do instead? Choose something productive that will have a material effect on your budget: Pay off a small debt or add a small deposit to your emergency savings, for example.

Here’s an adage you’ve probably heard: It’s not about timing the market, it’s about time in the market. That simply means that, historically, periods of decline have been followed by longer periods of growth.

Here’s proof. Since 1956, the average bear market (when a market declines by 20%) has lasted approximately 14 months, resulting in an average decline of about 36%. In contrast, bull markets (when markets gain 20%) typically persist for around 69 months, delivering average returns of 192%.

Translation? Staying invested in a diversified portfolio is may still the best approach for most people. Remember: You’re not saving for today; you’re investing for tomorrow. If you save, then take savings out, then repeat that cycle every time markets get jumpy, you may upend progress toward your financial goals

And, something else to consider: When markets are lower, you’re “purchasing” more at lower prices—equaling the potential for higher gains when markets rebound.

The thing about investing is, there’s always some degree of risk, whether you would call yourself or your investment mix conservative or aggressive. And your level of risk is going to be determined by your timeline, your goals, and how much you’re able to save. A financial professional can help review if your goals align with your risk tolerance. Read this piece to better understand both investment risk and risk tolerance, and try this quiz to try to identify your comfort level with risk (PDF).

The answer really depends on your retirement timeline and your savings.

If you have many years—say, a few or more—until retirement, it may be the best long-term strategy to keep your investment allocation where it’s at. (That’s assuming the allocation matches your risk tolerance.)

If you’re very near retirement, the answer is a little harder and may depend on how much you have saved and what your future retirement plans and goals include. You can take advantage of catch-up contributions, for example, to help boost what you’re saving. Your financial professional can help you figure out the best next steps.

If you’re at this stage of life, you may hear the term sequence of returns. It refers to a market turning negative as you are about to start or have started your retirement; then, if you withdraw too much retirement savings too fast, you risk depleting your future potential income. It can be a real worry.

So even if you’re retiring very soon, you hopefully don’t need all of your savings just yet. Even when markets are bumpy and you’re in or near retirement, your savings may still have some growth potential, depending on how they’re allocated.

Instead, if markets are volatile when you’re ready to or in retirement, think about taking out just what you need for right now. Perhaps you adjust your goals for the first year or two to pull back, even a little, and more carefully manage expenses. A financial professional can help you come up with a strategy.

Most retirement savings like a 401(k) and an individual retirement account are invested in funds that mix up investment types. They may include everything from stocks to bonds, equities, and more. That diversity is intentional, and is called asset allocation. It’s a way for your savings to, over time, balance levels of risk, with growth in some investments and less growth in others depending on market conditions.

In general, most people like to find an asset allocation that balances their risk tolerance with long-term goals. That’s why they’ll pick a fund that may have an age target, for example, or choose to rebalance their investment mix automatically as they age. Why? The more time you have to save before you need to retire, the less worried you may be about market volatility.

We’re sorry about your job uncertainty; that can cause emotional, mental, and financial stress, and we want to help. As you’re reviewing your options, here are a few things to consider:

• A 401(k) loan is a loan to yourself that must be repaid before you leave your employer. In your case, it may not be an option.
• A 401(k) withdrawal (if allowed by your plan) permanently reduces the amount you’re saving, and depending on your age and the age of the account, may be subject to both penalties and income taxes. There’s also an option called a hardship withdrawal, which may be more difficult to get, if it’s allowed by your plan.

As you consider how to manage this difficult time, think about if you have short-term options such as emergency savings to manage your budget. While a 401(k) loan must be repaid, a 401(k) withdrawal may derail your financial goals and plans. This article goes into more detail on the two 401(k) withdrawal options.

Plans generally allow a grace period to pay back or reduce the rollover amount that’s due. However, you must pay back the loan amount within the time period or face tax penalties. Talk to your plan provider or tax professional for more insights.

No—but you may, in certain circumstances, be able to take what’s called a distribution before you reach the mandatory age 59½ without a 10% early distribution penalty. The list from the IRS is extensive, and may include expenses such as a down payment on your first home, paying for higher education, and for certain birth and adoption expenses. (However, you’ll still have to pay taxes on the distribution.)

There’s one other option: taking what’s called an IRA rollover. If you take money out before you reach age 59½ but return it within 60 days as a rollover, you do not have to pay either taxes or penalties on that amount. And, you may only do this once in a 12-month period for any IRA account.

Not sure the exact impact on finances or taxes? Consult a tax professional.

Yes, typically you can, but it depends on the type of annuity you own. Many fixed, deferred annuities offer a free surrender amount each year if you’re still within the surrender-charge period. And some income annuities allow for a one-time withdrawal in addition to income payments. Keep in mind that additional withdrawals from your annuity can impact future earnings and future payments.

Variable annuities can be more complex. If you’re receiving guaranteed lifetime income payments, an extra withdrawal can change future payments. Contact your financial professional before taking a withdrawal from a fixed or variable annuity.

If you’re experiencing hardship, and your annuity is with Principal Life Insurance Company^®, call us at 800-852-4450 to discuss your options.

A financial professional can help you plan and deal with the ups and downs of the market and update and create a personalized financial plan. We can help you find a financial professional near you.