Turning Market Lemons into Lemonade
Saving for retirement is fun when the market goes up, but when the market goes down, your stomach might drop with it. A volatile year has made this feeling all too familiar. In fact, looking back, 2015 marks the lowest rolling 15-year average annual rate of return (3.96%) for the U.S. stock market in the last 80 years.
With a lack of market support, you might be feeling frustrated with the progress of your retirement savings. A workplace retirement plan is still a powerful tool to help you overcome challenging markets. Here are five ways that your retirement plan helps you accumulate wealth for retirement:
1. Free Money - Most workplace retirement plans offer employer contributions, boosting the value of your account. Not participating in the plan is the same as walking past $20 bills on the sidewalk.
2. Ease and Convenience - An automatic payroll deduction is the most painless way to save. If you don’t see it, you don’t miss it. Plus, other automatic features - such as annual savings increases and automatic rebalancing - make it almost effortless to stay on track.
3. Give Less to Uncle Sam - Regardless of income, saving in your workplace retirement plan grants you tax advantages. A Roth account allows for tax-free accumulation of investment earnings and income tax-free withdrawals in retirement. The younger you are, the more powerful the benefit of tax-free compounding can become. If you are currently in a high tax bracket, the money you save by depositing dollars in a pre-tax account saves you money right now. Better yet, splitting your retirement savings between a Roth and a pre-tax account gives you ultimate control over taxes in retirement since you decide from which account to pull.
4. Lower Cost Investments – Workplace retirement plans usually feature an investment lineup of institutional share classes of funds with expense ratios that average one-half that of the average retail mutual fund. Even for index investing, an index fund that costs 0.08% to a retail investor is often available within large workplace retirement plans at a lower cost.
5. Dollar Cost Averaging: Investing equal amounts every pay period throughout all market environments is a disciplined investment strategy that counteracts the temptation to buy high and sell low. It also lowers your average cost, thereby boosting returns.
Recent markets have made building wealth for retirement more challenging. You might be interested to know, however, that after the two other previous lows in the 15-year rolling period average annual rate of return (1942 and 1974), the average annual rate of return from the stock market in the subsequent 15 years was well above 10% per year (see the figure below). It is too easy to assume what has transpired recently will continue. History has often proven that assumption wrong.
In the meantime, your workplace retirement plan offers advantages you can’t find elsewhere, giving you the chance to turn market lemons into lemonade.