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Your Retirement Contributions Can Work Up to 50% Harder Now

By Dan Caplinger - Mar 21, 2020 at 7:01AM

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There are hidden benefits to tough market conditions.

Saving for retirement is a challenge for most people, even in the best of times. With the economy in its most precarious position in years, setting money aside for the distant future might be the last thing on your mind. If you're worried about how you'll make ends meet right now, then you simply can't afford to lock money up for the long run.

If you're fortunate enough to be able to keep making retirement contributions right now, however, there's a silver lining to the punishment that the financial markets have seen. The money you're able to contribute to a 401(k), IRA, or similar retirement account will potentially work 50% harder for you after the market decline -- and that could make for a bigger positive impact on the size of your retirement nest egg if you can stay the course.

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Image source: Getty Images.

The impact of a fast crash

To understand how this works, take a look at two investors. One was quick to get their $6,000 maximum IRA contribution for 2020 into the market, making equal $3,000 investments in the SPDR S&P 500 ETF (SPY 1.06%) in mid-January and mid-February. The other took longer to get cash ready but has $6,000 ready to go right now.

For the first investor, the price of the SPDR S&P ETF was around $332 per share in mid-January and $338 per share in mid-February. The twin $3,000 purchases were enough to buy 9.04 shares and 8.88 shares, respectively, adding up to 17.92 shares.

However, the second investor is now looking to get all $6,000 into the market at post-crash prices. The SPDR S&P 500 ETF's shares were recently available at around $228 per share. That's enough to buy 26.32 shares -- almost 50% more than the first investor was able to buy.

Put dollar-cost averaging on your side

Admittedly, most people don't have huge amounts of cash sitting around waiting to invest. But even if you're only able to start investing going forward, you'll still benefit from lower prices by using a simple strategy called dollar-cost averaging.

The concept of dollar-cost averaging is similar to what the example above describes. If you invest the same amount of money each month, then you'll be able to buy more shares when the price is lower and fewer shares when the price is higher. In choppy markets, that can be especially advantageous, as you'll consistently have lower average purchase prices for your stock than you would if you simply bought the same number of shares each month, regardless of the price.

It's easy to use dollar-cost averaging in a retirement account. Your employer will let you contribute the same amount to your 401(k) or similar workplace-sponsored retirement plan through payroll withholding, funneling your money into your nest egg without your ever seeing it. If you have an IRA, then your financial institution can make arrangements to have contributions automatically withdrawn from your bank account after your paycheck comes in, or you can manually handle each transfer yourself. Either way, you'll benefit from buying more shares when prices are cheap and fewer when prices go up.

Do what you can to keep saving

As tough as things are right now, it's still important to keep moving forward with your efforts in retirement planning. If there's any way you can put money to work toward your retirement, you can give yourself a boost of confidence from knowing that it'll do you 50% more good over the long run.

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