401(k) Markets & Economic Update: Q1 2025

First Quarter 2025 Market and Economic Update

Welcome to the first quarter 2025 market and economic update. We really want you to watch this video, so thanks for your time. We’re glad you’re here.

It’s always important as we end a year and begin a new year to take a look at what’s happened in the last year or even few years. I thought it’d be great for us to start with this particular slide. This is a look at the S&P 500, really going back to 1996, but I wanted you to see the last four or five years. What you’ll see is it’s been up and it’s been up a lot. That’s certainly a good thing if you’ve been participating and you’re invested in the markets. Let’s take a look at where the index is relative to prices. I have two orange circles on this screen, and what you can see is we’re kind of above an average price.

Now, does that mean you shouldn’t be contributing to your 401k? No, that’s not the point of today’s video. As we look back in the 1990s, you’ll see we got to a pretty high price. You see that circle over there on the left, and it’s higher than it is today. It’s not to compare the two completely, but it is to say, listen, we are at an above-average price. I thought it would be good if we maybe first thought about what that means for the next 5 or 10 years. In this next chart, you’ll see on the right-hand side, based on price, what the expected 5-year annualized returns are. This chart from our friends at JP Morgan implies that returns ought to be mid-single digits. Are they guaranteed to be mid-single digits? No, they could be higher or lower as well.

Let’s look at what happens specifically in your 401k plan if you catch a bad period of time. Let’s look at the 2000s. This chart goes from December 31st, 2000, all the way through December 31st, 2009, and it gives you the aggregate total return of the S&P 500 during that time period. That means the price return as well as dividends added into it. Guess what? Your grand total return in the S&P if you invested on December 31st, 2000, and waited until December 31st, 2009, was 0.1% for the entire time period. That’s not an average annual return; that is your total return. You made zero for that decade. Obviously, that’s bad.

When you think about that and investing in the 401k plan, you need to have the information from a dollar cost averaging perspective. Let’s look at this from a dollar cost averaging perspective. Let’s say you’re starting your career, making $50,000, and you’re going to begin immediately participating in your 401k plan. You’re going to put in the 5% that you have to put in to get the company match of 4%. The math on that is roughly $200 monthly for your 5%, and the company’s 4% is about $167 monthly. Your grand total monthly contribution is $367.

I already shared that the grand total return for the S&P during that time period was 0.1%. What happens if you start dollar cost averaging? Well, guess what? Take a look at this chart. Your returns aren’t 0.1% during that time period when you’re dollar cost averaging. If the market’s a little higher, you’re buying less; if the market’s lower, you’re buying more. Your grand total return during that time period ends up being between 14 and 15%. That’s from simply dollar cost averaging during that time period. As you can see from this slide, your principal amount was roughly $45,600, and it’s worth about $51,500. That’s good; we like that. It’s moving in the correct direction.

What happens if you do the same thing not just for those 10 not-so-good years but really keep doing it all the way through your career and increasing your annual contribution by 3%? In other words, that $367 is going up 3% the following year and every year thereafter for 25 years. The answer is that the money you’re putting into the plan is now worth $540,000 after 25 years. You’re still contributing 5% plus a 3% annual increase, so that $200 would effectively in year two be $206 a month. These aren’t massive increases; this is nowhere near maxing the 401k plan in terms of what you could put in. In fact, your grand total contribution for 2024 is just about $8,900. The max contribution was $23,000 that you could put in on the employee side, and then your employer can put in more on top of that. The match never counts towards your maximum contribution. All of that is to say you had a ton more runway in terms of what you could put in, but yet by just doing the baseline, you’re now at a $540,000 nest egg for retirement, which is great. It’s a move in the correct direction.

As you can see in the next slide, volatility is constant; it’s part of it. This slide shows purple dots under some gray bars. The gray bars are annual calendar returns for the US stock market, and the purple dots are time periods in the year where the market goes backwards. Your dollar cost averaging is getting the benefit of those purple dots. That’s the biggest takeaway. You will get ahead even if you have a more expensive market. There’s always a reason not to invest. This is what happens if one of those reasons is because the market looks like it’s a little more pricey. We need to proceed in beginning to save for our future as soon as humanly possible.

Thanks as always for watching. We’re glad you tuned in today.