As a bullish 2017 stock market continued its steady rise to record breaking levels, President Trump and others took the opportunity to highlight these gains for retirement savers and their 401(k)s. But that record-breaking streak came to end in early February as the stock market finally tumbled, reminding us that what goes up usually comes down.
The lesson from this: highlighting short-term gains to retirement portfolios can do more harm than good to long-term retirement savings and can weaken the financial well-being of today’s workers.
Behavioral economists tell us that people don’t often act in their best interests because we often suffer from inertia and a short-term vision when it comes to making important financial decisions. We are seeing this now as a rising stock market increased the size of retirement portfolios. A recent Washington Post article reported that some investment managers are seeing clients cash in on that euphoria by pulling dollars out of retirement funds for vacations, college and home improvement. This can be a costly mistake in the long run by jeopardizing retirement readiness.
If a 40-year-old couple decides to withdraw $20,000 from their retirement fund to pay for a luxury dream cruise, they would pay a 10% penalty, or additional $2,000, on the withdrawal. If they kept that same $20,000 invested in their 401(k) for 25 more years until they reach age 65 and, assuming a 4% annual return, they would have an additional $53,000 in their retirement portfolio. Is that luxury cruise worth the extra $33,000 or more over your lifetime if you take that money out of your retirement fund now to pay for it?
Read: The big mistake investors make when they hit that first $1 million
John Wasik, in a Forbes column published just after the market tumble, offers sage advice regarding how to view the stock market when it comes to retirement savings. “No matter which mix you choose, stay the course and hew to your savings goals. By knowing how much to save for retirement and keeping on the road to get there, you’ll surprise yourself at how much money compounds over time. Compounding is the one thing you don’t have to work for, and it’s effective for everyone.”
Now more than ever, employers and plan providers can make a difference by improving and investing in workplace-based retirement savings plans and offering financial literacy education to help workers make informed and better decisions about saving. Even the simple step of making available free online calculators so workers can see how much they need to save to achieve their goals or how much that dream vacation will cost them now versus 25 years from now can lead to better outcomes.
But the greater tragedy of only focusing on the gains in 401(k) or other retirement plans is that it creates a false sense of progress in the overall retirement readiness of American workers. A 2016 U.S. Government Accountability Office report found that the median defined contribution savings among working households aged 25-64 was $41,900 in 2013 and an estimated one-third of working households had no defined benefit or defined contribution retirement savings from a current or former job. And a rising tide can’t lift all boats if one-half of those boats aren’t even in the water. More than half today’s private sector workers – an estimated 55 million Americans – do not have access to an employer-sponsored retirement savings program.
Wall Street might be getting the message. During the recent World Economic Forum in Davos, Switzerland, BlackRock Chief Executive Larry Fink spoke about access and inclusion. “I think the question isn’t the financial system but the inclusiveness of the financial system, and we don’t talk about that at all,” he said during a panel about Remaking the Future of Global Finance.
Fink highlights that the equity market has nearly tripled in the last 10 years, which only benefits those who own stocks. “We are not addressing the issue of inclusion, of more participation in the marketplace,” Fink said on CNBC. And that “has to come from working with the majority of the population on financial literacy, and improving that financial literacy so they don’t feel frightened of moving their money into long term instruments.”
Providing greater access to retirement savings programs is important to improving financial well-being. Even families with modest incomes can find a way to save if they have good information, access to payroll deduction and advice about how to balance competing financial concerns, and budget and save for a range of different needs, such as short-term emergencies. Planning and discipline can help families avoid short-term decisions that could cost them dearly in retirement.
Policy makers understand the importance of developing innovative ways to expand access to the millions of workers who currently do not have an employer-sponsored retirement plan at work. Workers are 15 times more likely to save if they are offered a plan through their employer. In states like California, Connecticut, Illinois, Maryland, Oregon, Vermont and Washington, policy makers are partnering with the private sector to expand access to retirement savings options. They are offering simple, low-cost, easy ways for employers – especially small businesses who most often do not provide such plans – to provide their employees with access to individual retirement accounts (IRAs) or 401(k)s. These policy leaders are at the forefront of including so-called behavioral nudges, such as auto-enrollment, in program design to help millions of Americans begin to save for their retirement.
The best time to save is when things are looking good. The recent volatility of the stock market represents an important teachable moment about investing and saving for retirement. Saving for retirement is a long-term game. When times are good, and more people have more to save, policy makers, educators, employers and Wall Street should be doing even more to provide workers and families with the best information, financial literacy and savings options possible to help them make well-informed financial decisions to weather the economic storms and generate benefits to last a lifetime.
Angela Antonelli is a research professor and the executive director of the Georgetown University Center for Retirement Initiatives (CRI) at the McCourt School of Public Policy.