If you want a little help in explaining to defined contribution plan participants why trying to “time the market” is a bad idea, you have a new resource in J.P. Morgan Asset Management’s 2024 Guide to Retirement, released today.
Among four key retirement themes that get a highlight treatment in the 53-page guide is a view of why taking a long-term view on markets tends to pay off—and conversely, trying to “time the market” can be extremely costly.
The guide—which is filled with charts, tables and graphs analyzing the most significant issues impacting retirement—says missing the 10 best market days over the past two decades would have cut retirement account values by 50%.
“What you can control is how you react to markets, or another way, how you don’t react to markets… Attempting to time markets is incredibly difficult and can also end up eroding your future retirement plan balance.”
Mike Conrath, J.P. Morgan Asset Management
“It’s important for participants to focus on the things which they can directly control. No one can control markets. You can prepare for volatile markets—and should expect to experience volatility. But you can’t control what markets do or don’t do,” Mike Conrath, Chief Retirement Strategist at J.P. Morgan Asset Management, told 401(k) Specialist Wednesday. “What you can control is how you react to markets, or another way, how you don’t react to markets. This is what we’re showing on page 47 of J.P. Morgan’s Guide to Retirement—attempting to time markets is incredibly difficult and can also end up eroding your future retirement plan balance.”
Page 47 of the guide reveals that seven of the 10 best days for the S&P 500 occurred within two weeks of the 10 worst days, and six of the seven best days occurred after the worst days. The second-worst day of 2020—March 12—was immediately followed by the second-best day of the year.
The lesson? Don’t pull funds in reaction to market events.
“Think of your portfolio like a bar of soap: the more you touch it, the smaller it gets,” Conrath continued. “Stay focused on the long-term—and if a participant has a long time horizon and their goals haven’t changed, then investing in a diversified portfolio can result in a better outcome for their retirement. Over the long-term, cash alone won’t pay for retirement, so it’s important to get invested and stay invested.”
In addition to taking a long-term view of the market, the other three key retirement themes featured in the 2024 Guide to Retirement are preparing for unexpected spending shocks; new SECURE 2.0 provisions; and taking advantage of tax-advantaged retirement savings accounts.
“Saving for retirement continues to be challenging for many individuals, especially when faced with multiple goals and unexpected spending shocks. However, we feel optimistic for the future of retirement security as plan sponsors and legislators emphasize the need for broader access to retirement savings,” Conrath said. “Our 2024 Guide to Retirement has been designed to help advisors provide long-term investing strategies to best position clients to reach their retirement goals and plan strategically for their future.”
Spending and income shocks continue to be leading causes for 401(k) plan loans and withdrawals due to a lack of emergency savings, and effectively decrease the level of retirement readiness, the Guide reveals. Nine in 10 households experience spending spikes greater than their income, and one in three households cannot fund spikes with their income and cash reserves. This has led to households increasing their amount of credit card debt, taking out a loan from their 401(k) plan, or decreasing the amount of contributions they are making to their 401(k) plan.
More key topics covered include 401(k) plan withdrawal patterns; health care financial planning; tax diversification and a deep dive on tax rates as the Tax Cuts and Jobs Act sunsets after 2025; Social Security claiming strategies; and increasing use of automatic features in DC plans.
Regarding automatic features, in addition to the huge growth of auto-escalation, the guide shows auto enrollment in retirement plans has increased by 21% from 43% in 2013 to 52% in 2023.
It notes that SECURE 2.0 mandates automatic features in new plans, state mandates require them and most well-established plans already have them. The guide also finds nine out of 10 employees have a favorable/neutral view on automatic features, and devotes a page to showing the tangible benefits of auto escalation. In the example provided, account growth from auto-escalating with contributions rising by 1% annually from 3% until capping at 10%, results in an ending portfolio of $2 million compared to $880,000 with only a consistent 3% contribution.
Social Security claiming strategies are covered with pages and charts devoted to benefit claim timing trade-offs and considerations, a claiming decision tree, and maximizing benefits.
“Our clients trust and rely on the insights in the Guide to Retirement to turn complexity into clarity for the individuals and plan sponsors they serve,” said Steve Rubino, Head of Retirement, J.P. Morgan Asset Management. “We’re honored to put our deep understanding of people, markets, and the U.S. retirement system to work for millions of retirement savers across the country.”
SEE ALSO:
• 5 Key Themes in J.P. Morgan Asset Management’s 2023 Guide to Retirement
• T. Rowe Price Launches Social Security Tool Targeting Life Expectancy
• 401(k) Millionaire Ranks Spike 20%
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
