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Gold IRA Strategy: Valuable Tool to Reduce Impact of Volatility on 401(k)s and IRAs

Isaac Nuriani    |
Mar 10, 2023
  • 401(k)s and IRAs are susceptible to big losses from volatility.
  • Savers struggle to achieve a successful retirement in era of uncertainty.
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You may have heard there’s a looming retirement crisis in America. In a nutshell, the term refers to the sizable difference between the amount Americans have saved for retirement and the amount they actually need to retire comfortably. One estimate from 2022 pegs the total shortfall at slightly more than $7 trillion.[1]

Seven trillion obviously is a lot of money, but there is more to it than just total dollars. The problem might be a little easier to comprehend if we examine what’s at stake for the individual saver.

According to the most recently available Federal Reserve Survey of Consumer Finances, the median retirement savings of Americans between the ages of 55 and 64 is $134,000.[2] One popular rule of thumb says Americans retiring at age 67 should have roughly 10 times their annual income set aside.[3] By that standard, someone earning the median weekly salary of $1,085 should have at least $565,000 or so. And the more you earn, the bigger your required savings. For many Americans, that means having nest eggs of $1 million or more.

Quite clearly, $134,000 falls far short of even where relatively modest earners should be when they decide to stop working.

There’s a multitude of challenges in making sure one has set aside enough to live on comfortably in retirement. One of the biggest challenges is also one of the toughest to overcome: maintaining the discipline necessary to consistently make contributions to retirement plans such as IRAs and 401(k)s. One recent article at CNBC.com discussing this issue cites very-human frailties such as procrastination and an unwillingness to delay gratification as fundamental reasons why so many people fail to succeed at retirement planning.[4]

For the purposes of this article, however, let’s assume a person is earnest when it comes to the habits associated with retirement saving. Those habits are important – but they’re not everything. A whole array of challenges ultimately can serve to put a comfortable, secure retirement for many Americans out of reach.

Among those challenges is economic volatility, which is a topic I want to focus on today. As we’ve seen many times over the last two decades, economic volatility can have an especially jarring effect on 401(k) and IRA values. There are two reasons.

One reason for that jarring effect is the great impact volatility can have on the kinds of assets most commonly owned in retirement accounts which are predisposed to damage from volatility. Another reason – closely related – is that certain “real” assets with a reputation for serving as safe havens during periods of economic volatility typically aren’t accessible inside of 401(k)s and conventional IRAs.

Heavy exposure to economic volatility has the potential to leave a gaping hole in the overall retirement savings plans of many Americans. But I believe one strategy could help fill it: I’m talking about including a gold IRA in overall account holdings.

The gold IRA enables retirement savers to own physical precious metals on a tax-advantaged basis. Precious metals are “real” assets that have managed to stand tall during some of the most volatile and otherwise economically challenging periods in recent history.

To illustrate the potential value of a gold IRA in lessening the impact of volatility on retirement savings, I thought it might be useful to look at how precious metals did during three of the more economically turbulent periods in recent history: the 2008 financial crisis; the lockdown year of 2020, which the International Monetary Fund called “the worst economic downturn since the Great Depression”; and volatility-plagued 2022, which was ranked by Goldman Sachs as the sixth-most volatile year since the Great Depression.[5]

Let’s see what we find.

Precious Metals and the Challenges of a New Millennium

2008: Global Financial Crisis

U.S. economic fallout from the 2008 financial crisis – also known as the “Great Recession” – is morbidly impressive even today.

  • Nearly nine million unemployed
  • Unemployment rate to 10% by October 2009
  • Eight million home foreclosures
  • Average 401(k) balance down 25% in 2008
  • Nearly $20 trillion in household net worth lost[6]

What about the impact on retirement plans and net worth? I’ve always found it interesting how the financial media constantly harped on how much was lost, yet almost never seemed to talk about assets were resilient during that time. Precious metals are prime examples.

The formally declared U.S. recession that was triggered by the bigger global crisis ran from December 2007 through June 2009.[7] In that period, the price of gold appreciated 20%.[8]

But the story of precious metals and the financial crisis is bigger than the U.S. recession associated with the downturn. The impact of the crisis played out for years beyond the date of its “official” onset. And precious metals thrived.

For example, if we look at how metals fared for a full four years from December 2007 – through December 2011 – we find that gold and silver each climbed about 100%.[9]

In other words, during the U.S. recession, specifically, and throughout a more extended period, precious metals demonstrated why many have come to see them as “safe havens.”

2020: Year of the Lockdown

The events of 2020 are a textbook illustration of just how rapidly and significantly a sudden health crisis can change the complexion of the entire world.

The first cases of the then-unknown COVID-19 novel coronavirus developed in Wuhan, China, during the last two weeks of 2019. By the time March was over, the World Health Organization declared the outbreak to be a pandemic, all of Italy was on lockdown, and President Trump signed into law a $2 trillion stimulus package, and our nation saw the highest number of initial unemployment claims (weekly) in history.[10]

By the end of April, a stunning 54% of the global population representing roughly 60% of the world’s GDP was under either complete or partial lockdown.[11] In a related development, the U.S. unemployment rate reached its highest level since the Great Depression that same month.[12] Real GDP growth in the U.S. finished down 3.5% for 2020.[13]

In 2020, the nation and the world were subject once again to a significant amount of volatility and uncertainty. And, once again, gold and silver thrived. For the year, gold appreciated nearly 25% and silver surged twice that amount.[14]

2022: A Year of Exceptional Volatility

Volatility was the overriding influence on both the domestic and global economies in 2022. And that volatility had no shortage of energy sources.

Inflation was the most prominent of volatility’s fuels. Global economies designed expansionary fiscal and monetary policies to reduce the pandemic’s impact on the world’s citizens, and it led to high global inflation last year. In the U.S., the annual inflation rate at one point climbed over 9% and averaged more than 8% for all of last year.[15]

Price instability wasn’t rooted entirely in fiscal and monetary policy excesses, though. China continued to enforce controversial zero-COVID policies that locked down tens of millions of the country’s citizens and wreaked havoc on global supply chains.[16]

We can’t forget about Russia’s invasion of Ukraine in February 2022, which quickly evolved into Europe’s largest ground war since World War II.[17] In addition to the heightened general volatility that’s a natural consequence of such a conflict, the war is being fought in a region that historically has been an important source of food and energy commodities for a significant portion of the rest of the world.[18] The resulting supply disruptions have – unsurprisingly – further intensified global inflation.[19]

We also can’t forget about rising interest rates in 2022. Last March, the Federal Reserve initiated the fastest rate-tightening cycle in four decades.[20]

Put all of this inflation, rising interest rates, war, and ongoing pandemic consequences into a pot, stir it around, and what do you get? A lot of volatility. According to one estimate, volatility cost U.S. households $13.5 trillion in real net worth last year. And a recent study by Fidelity Investments determined that the average IRA and 401(k) balances fell by 20% and 23% last year, respectively.[21]

Yet, once again, precious metals persevered in the face of all this turbulence. To be clear, the performance figures of gold and silver weren’t particularly noteworthy. Because of the headwinds generated by the Fed’s rapid rate-hike agenda, the year’s numbers for metals were more muted than they likely would have been otherwise. But the fact remains that in a year marked by extraordinary volatility, one in which the average 401(k) balance lost nearly a quarter of its value, gold was basically flat and silver appreciated about 3%.[22] Precious metals, it seems, again demonstrated resilience in yet another economically tumultuous year.

Analysts: Economic Volatility Could Get Worse in the Years Ahead

We can’t know how long Americans will be dealing with fallout from the volatility that characterized 2022 – especially because the factors fueling that volatility are still very much in play.

U.S. inflation persists well above 6% and even showed signs recently of reaccelerating. In light of these price challenges, the Federal Reserve assures us that interest rates will head higher through the foreseeable future.[23] War continues to rage in Europe. The pandemic remains ongoing. And most economists say recession is on the horizon.

In other words, the volatility “story” told in 2022 may be recited again this year. That remains to be seen. But analysts who specialize in this area tell us that discrete global shocks and general economic uncertainty will be more prevalent in the years to come.[24]

 

……..

[1] Bloomberg Editors, AdvisorPerspectives.com, “America’s Retirement Crisis Is a Financial Crisis Too” (March 28, 2022, accessed 3/9/23).
[2] Andrew Osterland, CNBC.com, “Can you afford a ‘second act’ after retirement? Here are some questions to ask yourself” (October 15, 2022, accessed 3/9/23).
[3] Elizabeth Gravier, CNBC.com, “Here’s how much money you should have saved at every age” (February 10, 2023, accessed 3/9/23).
[4] Jasmin Suknanan, CNBC.com, “Here’s why our brains make it so hard to start saving for retirement” (February 27, 2023, accessed 3/9/23).
[5] Gita Gopinath, IMF.org, “The Great Lockdown: Worst Economic Downturn Since the Great Depression” (April 14, 2020, accessed 3/9/23); Jonathan Ponciano, Forbes.com, “Stock Market Braces for ‘Volatile’ Trading in Coming Weeks – Here’s How Much the S&P Could Tank” (December 15, 2022, accessed 3/9/23).
[6] Caleb Silver, Investopedia.com, “Over 10 Years Later, Lessons From the 2008 Financial Crisis” (December 2, 2022, accessed 3/9/23).
[7] National Bureau of Economic Research, “US Business Cycle Expansions and Contractions” (accessed 3/9/23).
[8] London Bullion Market Association, “Precious Metal Prices” (accessed 3/9/23).
[9] Ibid.
[10] CNN.com, “Covid-19 Pandemic Timeline Fast Facts” (September 4, 2022, accessed 3/9/23).
[11] IEA.org, “Context: A world in lockdown” (accessed 3/9/23).
[12] Christopher Rugaber, APNews.com, “Jobless rate spikes to 14.7%, highest since Great Depression” (May 7, 2020, accessed 3/9/23).
[13] Bureau of Economic Analysis, “Gross Domestic Product, Fourth Quarter and Year 2020 (Second Estimate)” (February 25, 2021, accessed 3/9/23).
[14] London Bullion Market Association, “Precious Metal Prices.”
[15] Bureau of Labor Statistics, “Consumer Price Index Archived News Releases” (accessed 3/9/23).
[16] Yang Jie, Wall Street Journal, “China’s Covid Lockdowns Hit Supplies to Companies Like Apple and Tesla” (April 8, 2022, accessed 3/9/23).
[17] Marc Santora and Mike Ives, New York Times, “One Week After Russia’s Invasion, Here’s How the War Is Evolving” (March 3, 2022, accessed 3/9/23).
[18] WilsonCenter.org, “System Shock: Russia’s War and Global Food, Energy, and Mineral Supply Chains” (April 13, 2022, accessed 3/9/23).
[19] Holly Ellyatt, CNBC.com, “From soaring food prices to social unrest, the fallout from the Russia-Ukraine war could be immense” (April 21, 2022, accessed 3/9/23).
[20] Aziz Sunderji, Wall Street Journal, “Fed’s Aggressive Rate Hikes Are a Game Changer” (November 21, 2022, accessed 3/9/23).
[21] Fidelity Investments, “Fidelity® 2022 Retirement Analysis: In The Midst of Inflation and Uncertainty, Retirement Account Balances Are Rising” (February 23, 2023, accessed 3/9/23).
[22] London Bullion Market Association, “Precious Metal Prices.”
[23] Jeff Cox, CNBC.com, “Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated” (March 7, 2023, accessed 3/9/23).
[24] Nicholas Bloom, Hites Ahir and Davide Furceri, Harvard Business Review, “Visualizing the Rise of Global Economic Uncertainty” (September 29, 2022, accessed 3/9/23).

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