Retirement Accounts Are Doing Well, But Rocky Times May Be Ahead
Retirement accounts of American workers have benefited greatly this year from the stock market’s successes. Many nearing retirement age are undoubtedly viewing their portfolios happily and making plans for how they’re going to use all that money. But with dark clouds of a financial crisis on the horizon and the potential for a war in Asia, they shouldn’t treat that money as a given.
Retirement Accounts in Better Shape Than Ever
Data compiled from over 20,000 companies comprising over 15 million 401(k) accounts and nearly 9 million IRA accounts shows that at the end of the second quarter of this year the average 401(k) account balance was $97,700. That’s a 9.7% increase since last year and a 33.3% increase from five years ago. The average IRA balance broke into six figures, standing at $100,200, an increase of 11.8% from last year and 37.1% five years ago.
The figures are looking even better for employees who have spent more than ten consecutive years contributing to the same 401(k). Their average balances have risen to $266,100, a 237% increase from ten years ago. But while those numbers may look rosy right now, investors should remain wary. Increases of that amount are often indicators of a market that’s firmly in bubble territory.
Stock Markets Are in a Bubble
Stock markets have had an amazing run this year, with all the major stock indexes seeing record highs. The Dow Jones, in particular, has made headlines, topping 20,000 points for the first time this year and just recently breaking through the 22,000 point level. In the past 18 months, the Dow has increased by nearly 40%. That’s a phenomenal run by any measure, but ultimately it’s not sustainable. Stocks have been buoyed by loose central bank monetary policy, but as central banks begin to tighten their monetary policy that bubble will eventually burst.
Investors should be more than a little nervous about their retirement savings, knowing that stock markets are in the middle of a bubble. The current run of stock index gains has many parallels with previous stock market bubbles. In the prelude to the stock market crash of 1929, the Dow Jones average increased 80% from the beginning of 1928 to the summer of 1929. The fall of 1929 saw increasing instability and volatility as investors began to lose confidence. By late October that crash was on its way, and on Black Monday and Black Tuesday the Dow lost 13% and 12% of its value, respectively. One-quarter of its value was gone in just days.
Even with those huge drops, the Dow’s slide after that was slow and steady rather than continuously precipitous. The Dow recovered somewhat during the early part of 1930 before resuming its downward course. By late 1930 the Dow had finally dropped below its levels from early 1928, and it continued to fall ever downward. The nadir occurred in July of 1932, at which point the Dow had lost over 89% from its 1929 peaks.
It’s important to remember that it took three years for that trough to occur. And while major losses occurred early, there was still plenty of time for investors to get out of markets, cut their losses, and protect their assets in the best way possible. What’s even more important for investors to remember is that it wasn’t until 1954 that the Dow finally eclipsed its 1929 peak. That’s 25 years of no gains. If a similar calamity were to befall investors today, those on the verge of retirement would not only see their savings wiped out, they would lose their ability to retire in comfort. Expectations of retirement would be replaced by the harsh reality of not having enough money to live on.
More recently, the dot-com bubble of the late 1990s and early 2000s saw the Dow Jones increase nearly 30% from the beginning of 1999 to early 2000, and nearly 50% from the beginning of 1998 to early 2000. By early 2003 the Dow had fallen 36%. More importantly, a number of the hottest technology stocks had lost most or all of their value as the companies issuing them went under. Investors whose holdings were laden with Pets.com or similar stocks saw particularly severe losses.
The recent financial crisis saw the Dow increase 32% from the beginning of 2006 until its peak in the fall of 2007. The slow decline from that peak accelerated during 2008 and by the depths of the crisis stock markets had lost over 50% of their value. Once again, those saving for retirement, on the cusp of retirement, or hoping to build up their wealth through investing in stocks saw their plans completely upended.
These historical examples should give investors pause. The latest increases in stock indexes have been achieved at much faster rates than during the dot-com bubble and the housing bubble. The potential for massive losses increases by the day. Wary investors should keep an eye on markets and be ready to shift their investments into safer assets such as precious metals should the need arise. The recent unease in markets could very well be a sign that the top has been reached. Those who get out before the crash will be much better off than those who decide to ride markets to the bottom.
The Threat of War
The threat of war is one of the factors causing unease in financial markets. The recent flurry of harsh words between President Trump and North Korean dictator Kim Jong Un has sharpened. News headlines announcing North Korea’s plans to attack the island of Guam, threats of retaliation from the United States, and reports of US plans to launch preemptive strikes against North Korea have people worried that war might break out.
Given North Korea’s ability to launch debilitating strikes against South Korea and the probability that China would get involved in any military conflict as it did during the Korean War, investors are right to worry. What might start out as a limited military action could easily spiral out of control into another world war. That could mean years or decades of weak stock markets, again destroying retirees’ hopes of a comfortable retirement.
The unease in stock markets and their potential volatility underscore the necessity of portfolio diversification, particularly into precious metals. Gold and silver have acted as safe havens and stores of wealth during times of crisis for centuries, and they continue to perform that function today. Those who wish to invest their retirement funds in gold and silver need to consult with financial advisors and tax advisors about the tax ramifications of transferring or rolling over retirement accounts into precious metals.
Thankfully, the development of precious metals IRAs such as gold IRAs and silver IRAs provides investment vehicles for people to invest in gold and silver and benefit from the protection that precious metals offer while still using pre-tax dollars. That allows investors to enjoy the same tax advantages as traditional IRAs while still protecting their retirement assets from a coming stock market crash.