Investing for retirement is one of the smartest money moves you can make. You need to put money into a 401(k) or other tax-advantaged retirement plan at a brokerage firm if you hope to enjoy any financial security as a senior because Social Security alone likely cannot support you once you leave the workforce.
Unfortunately, many people who made the right move and put money away for retirement faced a tough year last year. The stock market didn't do well, and the average 401(k) account balance took a pretty big dip.
Here's what happened over the course of the year, along with some advice on why it doesn't matter much in the end.
The average American faced big retirement account losses last year
In 2022, the average balance in workplace retirement plans was $144,280 at the start of the year. By the end of the year, it had fallen to $111,210. That's a $33,070 loss and almost a 23% decrease over the course of a single year.
This isn't surprising, since the S&P 500 index also dropped by close to 20%. The S&P 500 is a financial index that is made up of a weighted average of the 500 largest U.S. companies. It's a barometer for the performance of the market as a whole since it includes some of the biggest names across a wide variety of industries.
The median plan balance also declined to just $23,818 in 2022, which is the lowest it's been in a decade, and the annual median return in 2022 was 14.7% for defined contribution plans.
Don't be discouraged if your retirement account balance fell
If you worked hard to invest for retirement -- perhaps giving up little luxuries to transfer more money out of your bank account to your brokerage accounts -- it can be frustrating to see your balance decline.
But here's the thing: While it may be a bummer, it really doesn't matter if your investment account has a bad year because when you are investing for retirement, you aren't investing over just one year. You should be steadily putting money into your account over many decades and leaving it there to grow.
During a multi-decade period of investing, it's inevitable you're going to have some bad years. The stock market cannot go up all the time (if it did, there would be a lot more millionaires and billionaires). It naturally goes through cycles. There's a downturn, then there's a recovery.
If you did not sell any of your retirement account assets that were down at the end of 2022, you did not actually lose any money yet in reality -- you only lost it on paper. And if you have a good year this year, or next year, or in many years to come, you can make back those paper losses.
Let's take a closer look at the details. The S&P 500 had a bad year last year, but it has had bad years before and will have good years again. Just take a look at the historical data from recent years.
Invest for the long term
As you can see, ups and downs are part of life.
The key is to stay the course so you don't end up making your losses permanent by panic selling. If you see your balance has fallen over a year or two, just remind yourself that you have confidence in your investments over the long haul and keep looking forward. Don't panic, don't sell out of fear, and don't give up on your retirement security. Just keep on investing steadily over time in sound investments and your hard work will pay off for you in the end.
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