The Silver Lining of Volatile Markets? Your Retirement Savings

Scared to open your investment statements lately? I don’t blame you. Stock markets have dropped precipitously over the summer, inflation is on the rise, and, with the Federal Reserve announcement of the highest interest rate increase since 1994, big purchases are looking more expensive than ever. 

But before you despair, there is a silver lining for your retirement savings! The cost of retirement is actually getting cheaper. What does that mean for you? It means a smaller nest egg could still produce the same, or maybe even a better, lifestyle in retirement. Let’s take a closer look. 

An Inverse Relationship

An interesting fact that you might not be aware of is that the cost of retirement income actually moves in the opposite direction to interest rates. As interest rates rise, the cost of retirement income falls. This means that the total amount of money you need saved for retirement actually decreases with an interest rate hike. 

That sounds like good news, but you may still be looking at the stock market falling and your portfolio balance dropping and wondering how that fact helps you today. Well good(ish) news! 

Retirement income costs are currently falling faster than the stock market. So, 401(k) – or other retirement savings – balances are likely being put in a better position to meet your retirement needs than they were at the beginning of the year. Let’s walk through a quick example to see how this is working. 

Crunching the Numbers

Let’s imagine that you want to retire in 20 years and live off an income of $100,000 a year.* At the beginning of 2022, given where interest rates were, the current value of your desired retirement income was about $1.8 million.** That’s the total amount that you would need saved at retirement to be able to withdraw $100,000 a year.

Now, fast forward to today, where interest rates have gone up. Remember, the cost of retirement income moves in the opposite direction of interest rates. So, when we do the same calculation of how much money you need saved today, in August 2022, but use the new, higher interest rates, it turns out that the current value of your desired retirement income is now only about $950,000.***

 In other words, you now only need $950,000 saved on the day you retire to still be able to withdraw the same $100,000. The price got 53% cheaper! 

The Fine Print

We can’t forget, however, that the stock market is also falling and causing portfolio balances to lose money. So let’s take a look at what’s happening with your retirement savings. 

Since the beginning of the year, the stock market has fallen 20%. This means that if you had $500,000 saved on January 1, you would now expect to have about $400,000 saved (a loss of 20% of your portfolio, or $100,000). 

Does that mean you are in a better or worse position? In January, you were about 28% of the way to your goal ($500,000 saved / $1.8 million goal). Now, in August, you are 42% of the way to your goal ($400,000 saved / $950,000 goal)! So, without doing anything, you have actually come out ahead and improved your progress toward retirement by almost 15%!

For most people, given what is happening in the markets, the value of retirement income will have decreased more than any decrease in their portfolio balances. Don’t be afraid to open up your retirement savings statement, and remember that given higher interest rates, a reduced balance is still likely to provide more retirement income

There are a number of tools out there that can help you calculate where you stand, as well as tools to help you build a plan to succeed. Lasso is a great example of a tool that can quickly show you where you stand relative to your goals and develop a plan to make sure you are on track to achieving them. 

Make sure you’re taking advantage of these tools, because, as we like to say, “A goal without a plan is just a dream.”

Save for the Future with Lasso

We’re here to help you save toward your goals and gain more financial know-how along the way. Click here to download the Lasso app or to connect with a member of our team today.


*Assumes a 30-year retirement
**Assumes a 1.5% interest rate. Calculated by: 100,000 / (1.015) ^ 20 + 100,000 / (1.015) ^ 21 + … + 100,000 / (1.015) ^ 50 = $1,809,851
***Assumes a 3.5% interest rate. Calculated by: 100,000 / (1.035) ^ 20 + 100,000 / (1.035) ^ 21 + … + 100,000 / (1.035) ^ 50 = $956,672

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