What Does the Stock Market Crash Mean for Your Retirement Savings?

• Author: Kelly Cooke
• Posted: 2024-06-03

With turmoil in the tech world and rumors of government shutdowns, it's no surprise that the stock market has been on a bit of a downturn lately. It is definitely worrying when you check on your retirement account and see the numbers dropping. However, this stock market crash does not necessarily mean you should start panicking. Here's what you need to know about how stock crashes may affect your retirement.

Should You Be Preparing for a Bigger Crash?

Of course the first question on your mind is most likely whether you should be bracing for worse. All the volatility in the economic, healthcare, and political fields has certainly caused some issues. Data supports the idea that a crash is currently happening. Since the beginning of September, the S&P 500 has dropped by roughly 5% and the Nasdaq is down overn 7%.

However, this doesn't necessarily mean you should be pulling all your investments out of the stock market now. Many experts believe a downturn is coming this way, but trends are likely to reverse themselves over time. From a financial standpoint, the current dip in the stock market is more likely to be a temporary downturn, not a major crash. While there's no harm in examining your retirement investments, making any big changes might not be necessary.

Should You Liquidate Your Funds From the Stock Market?

When people see their investments start to drop, they are often tempted to go ahead and sell their stocks before value decreases. In most cases, this is a bad idea. Stock prices fluctuate constantly, but usually trend upwards over time. A slight dip now does not necessarily mean that the stock prices will continue to drop. It is typically better to hold onto your investments and wait for prices to rise again.

Since the stock market tends to increase over time, it is usually possible to wait out a crash as long as you have a balanced portfolio. The only reason to start pulling out your funds is if you are overinvested in overvalued stocks. However, most retirement funds tend to focus on reliable, stable stocks, so hopefully you do not have a lot of money tied up in a stock bubble.

Is It Wise to Invest Any More in Stocks?

Even if you aren't trying to cut your losses and withdraw all your investments now, it's understandable that you might be wary of investing more. There is always some unreliability with stocks, so there's a chance you could buy something and have it drop in value overnight.

However, it is important to remember that stock investment for retirement is usually a long term investment. A stock market downturn can be a good time to buy a reliable, high performing stock at a cheaper than usual price. As long as you are not trying to sell the stock in the next couple weeks, this could be a good idea. Like any other investment, this is only something you should do if it works with your budget. Do not spend more than you can afford to lose just because a stock seems like a really good deal right now.

How Can You Reduce Your Risk of Future Crashes?

If you are worried about crashes, it might be a good idea to take a look at how your retirement accounts are balanced. Stocks have a high rate of returns, so they are a popular choice. However, if you put all your money in stocks, then a severe crash can be enough to decimate your savings.

This usually is not a major issue for younger people, who have a while to wait until retirement. However, if you are already about to retire, your accounts might not have a lot of time to recover. As you get older, you may want to reduce the amount of stocks in your investment funds. A common rule of thumb is to subtract your age from 110 and use that number as the percent of stocks you own.

However, it really just comes down to your personal risk preference. If you are risk averse, you might want to transition to mostly bonds or other more conservative investments. Though these don't have such a promising rate of return, they perform very reliably.

Ultimately, the slight dip in stock prices does not need to be a major cause for concern. However, now is a good time to take a close look at your retirement strategy and see if any changes need to be made.