Rich Girl Roundup: When Your Retirement Accounts Haven't Grown

Katie: Welcome back, my Rich Family, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and as always, every Monday morning, Henah and I are gonna dig into and unpack an interesting money discussion. Before we do, here's a quick message from our sponsors. 

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Katie: All right, before we get into it, this week's upcoming main episode on Wednesday, it's about something that made me feel very chronically online: the antagonistic discourse between hustle culture and quiet quitting, and honestly, why I think they both kind of suck, but for opposite reasons. All right, Henah, onto the Roundup. 

Henah: Okay, so today's question is from Allison B. She said, “I have been maxing out my Roth IRA for at least five years and I've invested it in a couple different target date mutual funds, but my account balance has hardly budged. In fact, it's gone down a bit. So what gives? Have I just chosen the wrong funds? Is it just the nature of the market right now?” 

So I'm in the same boat, where I guess a couple weeks ago I talked about how I've started to max out some retirement accounts and I had some high gains for a little, but it feels like they're coming back down, and so it doesn't necessarily feel like things have been moving upward for me either. And I'm just trying to remind myself of you know, historical averages and the current economic environment. So this is where I think, Katie, you're gonna do a lot of reassurance right here. I already know there's gonna be some numbers thrown out, so I'm ready to hear all the math, 'cause I like that you come at my psychological doubt with facts. So what can you tell Allison and me, and maybe everyone else listening, to keep in mind right now? 

Katie: So “five years ago”…that means you started investing in 2018, at least in this example, maxing out a Roth IRA for at least five years. She mentioned, I think, “I'm invested in a few different target date funds.” We don't know exactly what she's invested in, so I'm gonna make an assumption so that we can do a back test, because I think the last year or two of returns has given us all a bit of, I'll say, “negative recency bias” about what happens in the stock market. Our short-term memories are very short. So I used a tool called Portfolio Visualizer. You can use it for free if you go to portfoliovisualizer.com. You can either back test a specific portfolio or an asset allocation. I typically back test asset allocations just to keep things broad, but I used VTTSX in my back test, their allocations.

Now VTTSX is Vanguard's target date fund for the year 2060. I picked 2060 just so we were roughly 40 years out, but I don't know how old Allison is, so it's possible she's in something different. But I wanted to see in this back test, had we started investing $6,000 per year, adjusted upward for inflation starting in 2018, what would've happened? 

Now I used 54% total stock market, 36% international market excluding US, 6.7% US bond market, and 2.8% international bond market. So if you're sitting there like the meme of the lady with the numbers around her head, it's basically…

Henah: Or just me, in this example.

Katie: …a 90/10 portfolio of stocks and bonds for this target date fund. So why don't you guess what you think happened? 

Henah: I'm going to guess that there were a bunch of really great years in the beginning and then a bunch of really bad years after that. 

Katie: Guess what you think the annual returns were overall, given the really good years and the really bad years since 2018? 

Henah: It's hard to say because to Allison's point, she's saying that she hasn't seen it budge, but I would guess less than 10%, but not nothing. 

Katie: Okay, cool. So these are not gonna be exact because we know that in a mutual fund, like a target date fund, the allocations are changing over time. That's what it's designed to do, is to get more conservative over time. So our back test that's basically keeping these proportions steady is not going to be precise, but we can get a sense for what would've happened between 2018 and now, given those parameters. The annualized return on the 2060 allocations that I just outlined was 6.32% per year on average. So in 2018 you were at around negative 8%, you were at positive 25% in 2019, positive 16% in 2020, positive 17% in 2021, and then negative 17% in 2022, there's your down year, and now year to date you're up 8%.

Henah: Hmm. That's not as bad as I thought it would be. 

Katie: Right. 

Henah: So it seems like maybe she's making some returns even if it seems kind of…stagnant, maybe, is the right word. What else would you wanna know if you're trying to figure out, to her point, is it in the wrong place or anything like that? 

Katie: A couple things that I'd want to know. First of all, I'd probably just wanna verify that the math is being done correctly. If you're invested in something that is similar to the portfolio we just talked about, you should be up pretty substantially at this point. Certainly not lower than when you started. But I'd also wanna say, you know, what target date fund are you in? Is it appropriate for your aging timeline? Did you accidentally sign up for the 2025 that is practically all bonds at this point? That would explain why it hasn't done much. But if you were consistently dollar cost averaging into the market over those five years, you should still be up overall at this point. 

The other question I would ask is, did you stop contributing during a downturn, or did you adjust your contributions when things started going south? Because that would also hurt your overall returns. I don't think that's the case here, 'cause she said she's been consistently maxing it out. But in general, if you stop buying when things are low, that is going to impact the annualized return that you get, because when you’re dollar cost averaging, you're buying high and low over time—it evens out.

I would also ask, did you pull out at any point? Now my guess is that she has not sold and bought back in, 'cause I think she would've told us that. But that's another way that people can shoot themselves in the foot, is panicking, selling, and then repurchasing things later. That's also gonna throw off the scenario that's being back tested. So that back test is assuming annual contributions, rain or shine, and then straight up buying and holding those assets as prescribed. So if you're deviating from those steps, it would give you different results. 

Henah: Yeah, that makes sense. I mean, what if you had tested it, not in a target date fund, but just sort of against the general market. Where would they have ended up? 

Katie: Yes. So I ran a similar back test for the S&P 500, because I was also curious about this, and the annualized rate of return over the last five years has been 9.66%. 

Henah: Hmm. 

Katie: So if you've held on for the ride, you still are getting the average historical return over the last five years. And as we all know, starting points really matter. I think the people who are hurting most right now are those who started investing in late 2021. Because they are now less than two years out from starting, and they basically bought in at the top and now we are on a downswing. But the important thesis that you're bringing to investing, if you're going to invest for the long term, is that over time, time in the market is gonna smooth those things out. That 20 years from now, 30 years from now, 40 years from now, it's not gonna matter that you started in 2021 instead of 2018 or 2020. Because you now have ideally ridden that wave up higher and higher and higher. So I think the really important takeaway is dollar cost averaging and remembering that it is the long game, and yeah, if you started in late 2021, you probably are down overall right now and it's not gonna feel good. But the good news is you're only 18 months in it. It's so little time in the grand scheme of things. 

Henah: Yeah. Is there any validity to maybe her point that the funds she's chosen are just wrong? Or what are the action steps she could take if she's feeling, yeah, I'm not sold that this was the right asset allocation for myself. 

Katie: It totally could be. Like we said, we know it was a target date fund, but target date funds really run the gamut, depending on when they're designed to end and when the glide path is getting really conservative. So I would definitely look into that and just make sure that you're in one that makes sense for your age. An easy way to do this is, if you're in your twenties, you're looking at one that's the date in the title is 40 years away. If you're in your thirties, you're looking at one that's 30 to 35 years away, so on and so forth. So that it's generally putting you right around traditional retirement age. And then there are some people that say that's still not aggressive enough. There are ways to make it more aggressive. You can add small cap value; you can add more large cap growth. There are things that you can do that are gonna adjust it manually, but I would definitely look at overall asset allocation and emphasize that point of, it sounds so simple, but sticking to the plan, not pausing contributions during downturns, not selling and rebuying outside of normal rebalancing or portfolio maintenance, but really those big “Oh crap, things are tanking, I'm going to pull out to stop the bleeding.” I think that's where people really do long-term damage to their returns. 

Henah: Yeah, I've been setting up a DCA every two weeks and it's not a ton of money, but it's something I don't change or think about. That's kind of the best-case scenario when things feel a little volatile. 'Cause I've gone through this where I'm like, well, what if I just held onto my money instead of trying to put it somewhere and then I lose 10%, or in that one year 2022, negative 17%. What about that emotional fear? Maybe I should have just kept the money in my own pocket. 

Katie: Yeah, well, one thing that I like to think about specifically with those tax-advantaged accounts is not negating the tax advantages that you're getting. So with the traditional 401(k), basically look at your marginal tax rate—that is the guaranteed ROI of year one, because that's the money you're saving on your taxes. So that's great. And with the Roth dollars, similar but long-term. So you're looking at it 40 years from now. “All right, maybe this money is down right now, but any gains this makes in the future are gonna be tax-free. And I would not have that if I had just held onto it myself.” I would also highlight that five years is a really short period of time in the investing world, and yet you still would have gained over that period. You'd still be up between 6% and 10% per year if you're looking at some of the portfolios we're talking about today.

So I think, as emotionally difficult as it is, and I feel this too, keep in mind I'm right there with you. So I'm dumping cash every two weeks into a taxable brokerage account that right now the overall return is like negative 5%. It's down tens of thousands of dollars. It's not fun to see that and then be like, “Yep, anyway, smash the button, put more money in.” But I do think that there's an element of this where you almost just have to override your animal instinct and think, “I don't need this money right now. This is for 20 years from now me; this is for 30 years from now me,” assuming that's true, and if it's not, don't invest it.

If it's for five years from now, it probably should not be in the market to begin with. So I think timelines and intent really make a difference in how you emotionally treat these types of decisions. 

Henah: Yeah, I like the reframing of the perspective that it's not about five years, it's about 50, it's about 30 years, and seeing how things could go. So this made me feel a lot better, also. Thank you, Katie. 

Katie: Well, good. So happy to hear it. That's what I'm here for. All right, that is all for this week's Rich Girl Roundup. We will see you on Wednesday to talk about hustle culture and quiet quitting, and which one wins? And spoiler: why it’s neither. Bye.