Since the first of the year, the S&P 500 is down more than 16%. Depending on how your retirement funds are invested, you might be seeing a drop of 10% or more in your balance. The big question is: Can you still retire a millionaire after this stock market sell-off?
The answer depends on multiple factors -- including how old you are, how you're invested, how you spend your income, when the market recovers, and so on. And while you can't predict the future precisely, you can evaluate whether you're still on track to save seven figures for retirement. Read on to learn how.
1. Check your retirement balance and timeline
The first step is easy. There are two parts. One, check your retirement balance today. And two, settle on what year you'd like to retire. You'll plan for that targeted retirement date first, and then consider adjusting if that looks unrealistic.
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2. Learn to use a compound interest calculator
A compound interest calculator like this one is your best friend for informal retirement planning. Using your actual balance and monthly contributions today, plus an estimated timeline and growth rate, you can predict your balance at retirement.
The tricky part here will be estimating your growth rate. If you are mostly invested in equities, you can start with a market average rate of 7%, as this is in line with the stock market's historical performance after inflation. But this rate is only applicable for planning when the timeline is 10 years or longer.
Given the state of the market today, you can't count on seeing growth of 7% in the next 12 or 24 months. But you might reasonably see a 7% average over the next 10 years. It would likely play out as lower growth (or negative returns) in the immediate future, followed by higher growth when the market recovers.
Use a lower interest rate if your timeline is shorter than 10 years, or if you are heavily invested in fixed-income securities versus equities. You might start with 4% or 5%.
3. Look at different scenarios
The calculator can quickly tell you whether your retirement balance will reach seven figures on your timeline at your expected growth rate. If the answer isn't what you want, your next step is to play with the numbers.
You can't change your current balance, but you can look at higher contribution amounts and longer timelines. This will show you what it'll take to get you back on track for your millionaire retirement.
While you're at it, look at what planners call "downside scenarios" too. See what happens with lower interest rates and lower contribution levels. This provides some insight into how things might play out if your income changes for the worse or the recovery is slow.
4. Plan
At this point, you should have the information you need to plan your next move. It might involve raising your contributions, delaying retirement, or both.
Raising your contributions is often the best approach if you can do it. You'll be investing at a time when share prices are down -- which means you get more shares for your money. That positions you well to benefit once the market recovers.
5. Reassess
Life rarely goes according to plan, so you'll want to repeat this process in one year. By then, your timeline will be shorter, and your balance will have changed. Hopefully, the market climate will have evolved too. Those factors affect your outlook on retiring a millionaire -- so you may need another adjustment to keep that target in your sights.
Down markets are part of the process
Investing in the stock market is a popular and effective strategy for amassing a seven-figure retirement balance. Down markets like this are troubling, but they are also part of the process. You can't avoid them. What you can do is accept the downturn, recast your plan based on the information you have, and have faith that a recovery will eventually follow.
