‘If you feel like you’re behind if you don’t get 12%-plus returns every year, then maybe you need to re-evaluate your plan’

If the U.S. stock market drifted into a “lost decade” in which returns stagnated in comparison with the stellar run of recent years, would retirees and those nearing retirement be doomed?

The market has been very kind to workers’ 401(k) plans in recent years. This year, the S&P 500 SPX is poised to post returns of more than 20%, building on similar gains from last year.

But some Wall Street banks, including Goldman Sachs (GS) and JPMorgan Chase (JPM), along with investment-management shops GMO and Apollo Global Management, have cautioned about the potential for dramatically lower returns going forward. How bad might things get? Goldman Sachs warned that the S&P 500 could be coming into one of its weakest eras of returns in the past century.

Read: Wall Street is worried stocks might be on the cusp of a ‘lost decade’

Of course, not everyone agrees that the market will soon begin to return dismal results. But if the S&P 500 did produce returns of, for example, 3% a year over the next decade, how would that affect your retirement plans?

Read: Are U.S. stocks really headed for a ‘lost decade’? Why one strategist disagrees.

Regardless of what the stock market does, retirement savers should not panic, advisers say. Instead, they should go back to the basics of their long-term financial plan and tweak that if necessary – without losing sight of their long-term goal. How far someone is from retirement will dictate the actions they should take.

“It’s natural for those in retirement or preretirement to worry about what could happen. Those who stick to their plan do better,” said Nilay Gandhi, a senior wealth adviser at Vanguard. “Don’t panic during market turmoil. Those who overreact can see their performance impacted quite a bit.”

Trying to time the market is a losing strategy, Gandhi said.

Investors are currently benefiting from the market’s recent strong gains, putting them in a solid position, said Rob Williams, managing director of financial planning at Charles Schwab. Schwab is not in the camp of financial firms expecting a “lost decade,” he said.

“The returns of the U.S. market for the past three to four years continued to be extremely strong – so you’re ahead of plan,” Williams said. “If you feel like you’re behind if you don’t get 12%-plus returns every year, then maybe you need to re-evaluate your plan.”

Williams cautioned investors against reacting emotionally or relying on their most recent financial statement to predict the future.

“It’s very normal to have fear. The best way to address worry, if you have it, is to have a realistic plan,” Williams said.

So what should your plan be?

Those who are at least a decade from retirement will benefit from the U.S. and global economies continuing to grow, driven by efficiency, innovation and productivity gains, Williams said. The closer a person is to retirement, the more cash and fixed-income investments would provide a defense, he noted.

“If you’re more than 10 years from retirement, an aggressive portfolio with a higher allocation to stocks can serve you well, as market downturns are less likely to impact your long-term income prospects. However, as retirement approaches, caution becomes essential,” said Michael Resnick, a senior wealth adviser with the Alera Group.

Investors with 10 years to retirement should make sure their portfolio remains diversified, with some exposure to sectors or asset classes like energy or precious metals, which may perform better in a flat market, suggested Logan Queck, a financial adviser and founder of Total Wealth. Consider adding international exposure for further diversification, Queck added.

As people get closer to retirement, their strategies should change.

“A bear market within five years before or after retiring can significantly affect the longevity and stability of your income. Shifting funds from stocks to bonds as you near retirement can help shield your savings from market volatility, giving you greater confidence that your income will last a lifetime,” Resnick said.

With five years to retirement, it’s still important to seek growth, but investors must also manage risk, Queck said. A balanced, diversified portfolio of stocks, bonds and alternative assets would help protect against volatility and inflation, he said.

And with retirement on the near horizon, there’s more to worry about.

“If you’re two years away from retirement, your focus should be on preserving wealth. Reducing risk in your portfolio is key, with a shift toward bonds, dividend-paying stocks and income annuities,” Queck said. “With higher interest rates, annuities are now more attractive, offering predictable income for life and flexibility for beneficiaries if life is cut short.”

Having a cash reserve covering one to two years’ worth of expenses will help investors avoid needing to sell investments during downturns, Queck said.

Regardless of where people are in their retirement trajectory, any slowdown in the stock market could be upsetting, said Marta Norton, chief investment strategist at Empower, a retirement plan provider.

“Given how strong markets have been, there’s a good chance disappointment could prove jarring to the typical investor, especially those for whom the great financial crisis is a history lesson and not a lived experience,” Norton said.

“Market weakness is a feature, not a bug, of investing. Given that we have had a relentlessly strong stretch of returns – the COVID interruption aside – it’s certainly possible we could experience disappointing performance,” she said.

But that’s where advice, planning and consistency come into play, Norton said. Investors can lean on the built-in discipline of 401(k) plans, such as automated deductions from each paycheck to make regular investments – whether the market is up or down – and auto-escalation, which helps people save more each year.

“Here’s the overarching point: The retirement model is built for long-term resilience. Investors who are taking advantage of all of its features have nothing to fear from lower prospective returns,” Norton said.

-Jessica Hall

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