Average Retirement Account Balances Are Down, but There’s a Bright Spot for Savers

The first quarter of 2022 wasn't kind to retirement investors. The benchmark S&P 500 index shed about 5% of its value while the tech-heavy Nasdaq 100 dipped more than 9%. If your retirement account holds any broad-market funds, you've felt the sting of this downturn.

A recent study from financial company Fidelity confirms many retirement savers are in the same boat. The analysis finds that first-quarter average IRA balances dipped about 6% to $127,100 from the prior quarter. First-quarter average 401(k) balances fell 7% from the fourth quarter, landing at $121,700.

Image source: Getty Images.

The good news: down but not out

Retirement savers lost wealth in the first quarter, which is never a good thing. But here's the bright spot: The balance declines were in line with market performance. That indicates savers are largely staying the course with their retirement plans. Balances dropped, because the market is down — not because savers sold their funds or stopped investing.

Steady asset allocation

The study also reports only 5.6% of 401(k) savers changed their asset allocation. This compares to 5.3% in the prior quarter.

Asset allocation is the composition of your investments across different asset classes like stocks and bonds. Your asset allocation heavily influences your risk exposure. As an example, a portfolio of 90% stocks and 10% bonds would rise and fall closely with the stock market. By comparison, a mix of 50% stocks and 50% bonds would be far more stable.

The low instance of asset allocation changes means savers kept their cool through those first-quarter market declines. Widespread allocation changes would signal the opposite — that savers panicked. This often takes the form of lower stock exposure as investors sell to cut their losses.

The case for staying the course

Data by YCharts.

Unfortunately for savers, the tough market has continued beyond the first quarter. As of this writing, the S&P 500 is down more than 13% for the year, and the Nasdaq 100 has fallen 23%.

Even through double-digit declines, most retirement savers probably benefit from doing nothing. Keeping your portfolio and allocations intact has two benefits. First, maintaining your equity holdings sets you up for gains when the market recovers. Second, continuing to invest in equities at lower share prices pads your share count efficiently.

Selling now, on the other hand, kicks off events that likely reduce your long-term returns. To start, liquidating in a down market generates less value. And shifting into safer instruments like cash or Treasury bonds limits your upside potential later, since these won't appreciate when the market recovers.

You'll also face the problem of deciding when to invest in stocks again. Do it early and you could see unrealized losses after the fact. Do it late and share prices will be high — probably much higher than when you sold. It's a lose-lose situation.

Keep calm and carry on

Turbulent markets happen, and they're always tough to manage. Chances are you kept your cool in the first quarter of this year. As this market plays out, keep channeling that calm.

Remember the stock market has always recovered from downturns — and emerged stronger on the other side. Keep a level head and your 401(k) balance can do the same.

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