My Retirement Account Is Losing Money: What to Do Next

Seeing retirement account balances decline can be unsettling, especially after consistent contributions. Many experience anxiety during economic uncertainty. Understanding that market downturns are a normal, cyclical part of investing is a first step. This article provides guidance on why your retirement accounts might be losing money and what actions to consider.

Understanding Market Fluctuations

Retirement accounts can experience losses due to external factors influencing market performance. Economic cycles, characterized by expansion and contraction, impact investment values. During a recession, corporate earnings may decline, leading to lower stock prices.

Inflation, the sustained increase in prices, also affects investments by eroding purchasing power. If investment returns do not outpace inflation, your real return is negative. Rising interest rates, often used by central banks to combat inflation, can make borrowing more expensive for companies and consumers, potentially slowing economic activity and impacting stock valuations. Higher interest rates can also make fixed-income investments more attractive, diverting money from the stock market.

Geopolitical events, such as international conflicts or political instability, introduce uncertainty into global markets. These events can lead to sudden swings in stock prices and impact investor sentiment, though their long-term effects are often limited for diversified investments. Company-specific performance, driven by management decisions or industry challenges, also plays a role. Understanding these broad market dynamics helps recognize that account losses often reflect these larger forces.

Evaluating Your Personal Financial Position

Assessing your personal financial situation is an important step when your retirement accounts show losses. Your personal risk tolerance, your willingness to accept investment fluctuations for higher returns, should guide your decisions. Understanding this comfort level helps determine if your current investment strategy aligns with your emotional capacity for market volatility.

Your time horizon until retirement is another factor. If retirement is many years away, you have more time for investments to recover, as the market historically rebounds over extended periods. Conversely, nearing retirement means losses can more immediately impact your ability to fund post-career expenses, suggesting a more conservative approach. An emergency fund is also important, providing a financial safety net for unexpected expenses and preventing withdrawals from investments during a downturn. This fund typically covers three to six months of living expenses.

Making rash, emotional decisions during a market downturn can be detrimental to long-term financial health. Selling investments at a loss can lock in those losses and prevent participation in subsequent market recovery. Calmly evaluating your financial circumstances, rather than reacting to short-term market movements, allows for more thoughtful planning. This self-assessment forms the foundation for any actions you might consider.

Actions to Consider During a Downturn

When facing a retirement account downturn, reviewing your asset allocation is an important step. Asset allocation refers to the mix of investment types, such as stocks, bonds, and cash, within your portfolio. Ensuring your allocation aligns with your risk tolerance and time horizon is important, as market movements can cause your portfolio to drift from its target percentages.

Consider rebalancing your portfolio, which involves adjusting your asset mix back to its target allocation by selling disproportionately grown investments and buying more of those that declined. This disciplined approach helps manage risk and can involve selling high and buying low. If making regular contributions, dollar-cost averaging can be beneficial. This involves investing a fixed amount at regular intervals, regardless of market fluctuations, meaning you buy more shares when prices are low and fewer when high, potentially lowering your average cost per share.

For investments in taxable brokerage accounts, tax-loss harvesting can be applicable. This strategy involves selling investments at a loss to offset capital gains and potentially a limited amount of ordinary income. The Internal Revenue Service (IRS) allows individuals to deduct up to $3,000 of net capital losses against ordinary income annually, with excess losses carried forward. However, the IRS wash-sale rule prohibits claiming a loss if you buy the same or a “substantially identical” security within 30 days before or after the sale. Consulting a financial advisor can provide personalized guidance, offering insights into complex tax rules and helping align your investment strategy with your financial goals.

Maintaining a Long-Term Perspective

Adopting a long-term mindset is important when investing for retirement, particularly during market volatility. Retirement savings are typically invested over decades, a timeframe where short-term market downturns often become less significant. Historical data indicates markets show resilience over extended periods, recovering from economic shocks and growing over time.

The power of compounding returns is a key advantage for long-term investors. Compounding allows investment earnings to generate their own returns, creating a snowball effect where money grows exponentially over time. Starting early and making consistent contributions maximizes compounding’s benefit.

Downturns are a normal, recurring part of the investment cycle. Patience is key, as attempting to time the market by selling during a decline and buying back later is difficult and often results in missed recovery opportunities. Sticking to a well-thought-out investment plan, rather than reacting emotionally to short-term fluctuations, helps maintain progress toward retirement goals. This disciplined approach helps ensure your portfolio is positioned for growth when the market eventually rebounds.