Line chart on downward trend, dollar bills, stock martket chart on background © iStock

When stock market prices gyrate, heading in a downward spiral, it can be tempting to abandon the whole retirement savings thing. But quitting when you’re down is exactly the wrong knee-jerk reaction. In fact, that may be the best time to start saving even more money.

How much are you saving, anyway?

Stock markets move in cycles — sometimes they scale mountains and other times they fall off a cliff.

Most retirement savings plans start with the premise that you’ll get some sort of return on your money. The rate at which you save is based on the assumption that you’ll get a minimum rate of return that, when combined with your rate of savings, will help you reach your retirement goals.

But how do you figure out the rate at which you need to save? Should it be 10% of yearly pay, 12% or even 17%? And what if you don’t get your minimum rate of return for years at a time?

Enter retirement researcher Wade Pfau, Ph.D., CFA, professor of retirement income at The American College in Bryn Mawr, Pennsylvania. His research is recasting the way people approach retirement saving.

He looked at the rates at which a hypothetical person would have had to save during various historical time periods. For instance, he examined what someone should have saved through the stock market crash in 1929 and the Great Depression; the stagflation era of the 1970s; and the past couple of decades, which saw 2 two major stock market booms and busts.

“The safe savings rate … is the maximum of all the minimum necessary savings rates from overlapping historical periods needed to build up enough wealth so that you can afford your desired retirement expenses,” Pfau writes on his RetirementResearcher.com blog.

His research reveals that the safe savings rate for all time periods was 16.62%, assuming a 30-year savings period and a 30-year retirement. So to conform to his thesis, it’s a safe bet to save at least 16.62%.

“The safe savings rate is assuming you ignore the market; it’s a set-and-forget plan,” Pfau says.

The lowest necessary savings rate he discovered was 11.2% for people leaving work between 1946 and 1949.

Which investor fared the best? Between October 2007 and December 2014, the “mattress” investor put $250 a month in a non-interest-bearing account. The “grin’n bear it” investor put money in the Standard & Poor’s 500 index through thick and thin. And the “lucky” investor put $250 a month under the mattress until March 2009, after which the money went into the S&P 500.

By December 2014, the “mattress” investor had $22,000. The “grin’n bear it” investor accumulated $37,593. Note that the “lucky” investor amassed $41,864. Note that the lucky investor would have had to accurately predict the exact bottom of the market in March 2009.



You could probably save more

There is a strong argument to be made for saving even more when the market heads south.

“Certainly if you have reasonable expectations that market returns will be lower in the future, you need to save more and assume a lower spending rate,” says Pfau.

For instance, a prolonged bear market could skew your expected returns downward, necessitating a higher savings rate.

But a second argument favors buying stocks when prices are lower because, essentially, you’re buying them on sale.

Smart to buy when stock market prices fall

“If people bought their stocks the same way they bought their socks, we’d all be better investors. But they don’t do it,” says Joe Goldberg, director of retirement plan services at Buckingham Asset Management in St. Louis.

“What we tend to see when markets take a dip, (people) say, ‘I should stop contributing because my account is going down by more than I’m putting in,'” he says.

It can feel like throwing good money after bad, but it’s not if you’re investing in mutual funds or companies you strongly believe will recover. In that case, buying more at a lower price just makes sense.

“They should be putting more in,” says Goldberg. “At low prices, expected returns are higher.”

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