Abandonment risk and its impact on retirement savings

April 16, 2025 | 7 min read

Mike Reidy

Client Portfolio Manager

Retirement savings is a critical financial goal that many individuals strive to achieve throughout their working lives. As people live longer and face increasing economic uncertainties, investors cannot overstate the importance of building a robust retirement portfolio. However, a significant threat to this objective is the concept of "retirement savings abandonment risk." This risk can lead to premature withdrawals and discontinuation of contributions, jeopardizing long-term financial security. Understanding and mitigating this risk is essential for reaching retirement goals.

What is retirement savings abandonment risk?

Retirement savings abandonment risk refers to the likelihood that individuals will stop contributing to their retirement accounts or withdraw funds prematurely. This risk is particularly concerning in volatile market conditions when investors may react emotionally to downturns. Most retirement portfolios are designed to balance market risks, such as interest rate and equity risk, with shortfall and longevity risks—the risk that your savings will be too small to finance your retirement or that you will outlive your savings. While addressing these risks is vital for a successful retirement outcome, it often requires taking on additional market risk. Unfortunately, this can inadvertently introduce abandonment risk.

Risks for retirement savers

Market risk: refers to how investments react to market volatility. It is also synonymous with abandonment risk or the risk that participants will abandon their investment if they feel a negative experience is too severe.

Inflation risk: the risk of reduced purchasing power due to rapidly rising prices. Longevity risk: the risk of an individual outliving their savings, either from a savings shortfall or living longer than planned.

Shortfall risk: the risk of not having enough savings to last throughout retirement.

From Principal’s research, we can observe this behavioral finance phenomenon when investors exit their retirement plans during market downturns, typically opting for safer, cash-like investments at the worst possible time. Abandoning a retirement investment strategy at the market's lowest point can have severe consequences, ultimately jeopardizing an investor's retirement goals. The implications of abandoning a long-term investment strategy can ripple through a retiree's financial life, leading to a loss of potential growth and increased reliance on social safety nets.

Common scenarios where abandonment occurs

At Principal Asset Management, our proprietary research reveals several behavioral and emotional factors that contribute to abandonment risk, including:

Loss aversion: Research shows that investors tend to feel the pain of losses more acutely than the pleasure of equivalent gains. This can lead to rash decisions during market downturns.
Myopic risk aversion: Individuals often focus too heavily on short-term market fluctuations, overshadowing their long-term investment objectives. This is especially true for those nearing or in retirement, who may panic and withdraw during a downturn.
Recency bias: Investors frequently overweight recent market performance, which can skew their decision-making. Investors may be more inclined to abandon their savings plans if the market performs poorly.
Flight to safety reflex: During times of volatility, the emotional response to seek safety in cash-like investments can lead to premature withdrawals, further exacerbating the problem.

What drives abandonment risk?

Studies in behavioral finance indicate that risk tolerance varies with age. Younger investors may be more willing to take risks, but as individuals approach retirement age, their risk tolerance typically decreases. When faced with a market downturn, older investors may abandon their plans for perceived safer investments, increasing their risk of financial shortfalls as they cross into and live in retirement.

Based on our proprietary research, different age groups exhibit varying risk tolerance levels. The risk of abandoning retirement plans increases as individuals approach retirement, peaking at the time of retirement. Historically, we’ve observed a rise in the abandonment of retirement plans during significant market downturns, which is detrimental for participants.

Our projections for future abandonment risk are grounded in a 2.0 to 2.25 standard deviation shift alongside our updated annual portfolio risk and return assessments. For younger investors (ages 25-50), we identify a critical threshold at a -25.9% annualized return over two years. For those nearing retirement (ages 50-65), this threshold is -13.5% over the same period. Finally, for retirees (ages 65 and older), we consider a -9.0% annualized return over two years as the critical point.

Once investors have abandoned their retirement plans in favor of safer investments, re-entering the market can be psychologically and emotionally challenging. That’s especially true after a missed market rebound, which may create a cycle of lost opportunities and reduced growth potential

Abandonment risk often leads to a "buy high, sell low" scenario, which can dramatically alter the trajectory of retirement outcomes. If investors abandon their plans at the wrong time, they may face increased shortfall and longevity risks, significantly impacting their quality of life during retirement. Asset allocators must consider these factors to provide retirement investors the best chance for success.

Understanding how abandonment risk affects retirees differently

Research indicates that abandonment risk varies across age groups. Studies show that younger investors are more likely to remain invested during downturns, while older investors are more prone to withdraw funds. Understanding these dynamics is essential for developing targeted education and strategies to mitigate this risk effectively.

Younger retirement savers: Generally, younger investors have a higher risk tolerance and can withstand large market drawdowns. Their invested capital is typically smaller, and their human capital (the present value of future earnings) is much higher. This means they have time on their side to recover from market fluctuations.

Employees nearing or in retirement: Conversely, individuals nearing retirement, particularly those already retired, exhibit much lower risk tolerances. For someone in retirement, even a drawdown of over 9% can result in many retirees abandoning their investment plans at precisely the wrong time. The consequences can be devastating, substantially reducing their retirement income and overall quality of life.

Behavioral finance plays a crucial role here. Psychologically, it may be challenging for individuals who have abandoned their retirement plans to re-enter the market after it rebounds. This creates a situation where they can miss out on potential gains, resulting in permanent losses and further exacerbating their financial challenges.

The impact of abandonment risk on retirement savings

The consequences of abandonment risk on retirement savings can be profound and multifaceted:

Loss of long-term growth: One of the most significant impacts of abandonment risk is the loss of long-term growth potential. Abandoning contributions can severely hinder the compounding effect of investments. For instance, during the COVID-19 pandemic, those who remained invested experienced substantial returns compared to those who exited the market. Investors who withdrew during the downturn may have missed the subsequent recovery, leading to a significant opportunity cost.

Early withdrawal penalties: Accessing retirement funds prematurely often incurs tax penalties and fees, further diminishing savings. These costs can compound over time, resulting in a significantly reduced nest egg for retirement.
Reduced quality of life in retirement: Financial insecurity in later years can increase reliance on social safety nets or family support. This affects the individual's quality of life and can burden family members and society.

Strategies to mitigate retirement savings abandonment risk

Mitigating retirement savings abandonment risk requires a multifaceted approach:

Employers can significantly support retirement savings by implementing auto-re-enrollment in retirement plans, thereby proactively including employees. A welcoming and user-friendly experience is crucial, as it can help individuals easily navigate their retirement options. Additionally, incorporating behavioral nudges—such as reminders and progress tracking—can encourage consistent contributions and foster a sense of commitment. Encouragement and practical tools will empower employees to actively engage with their retirement goals.

Professional asset management: Engaging with asset managers who understand the complexities of retirement investing can help mitigate abandonment risk. These professionals can design portfolios that account for market volatility, mitigate risks associated with retirement investing, and keep investors on track with their long-term goals.
Education, awareness, and employer support: To address abandonment risk in retirement planning, it is essential to implement financial literacy programs that highlight the importance of consistent saving and provide tools for visualizing long-term goals. Understanding the effects of market fluctuations can help investors stay committed during downturns.
- Employers can significantly support retirement savings by implementing auto-re-enrollment in retirement plans, thereby proactively including employees. A welcoming and user-friendly experience is crucial, as it can help individuals easily navigate their retirement options. Additionally, incorporating behavioral nudges—such as reminders and progress tracking—can encourage consistent contributions and foster a sense of commitment. Encouragement and practical tools will empower employees to actively engage with their retirement goals.
Emergency funds: Encouraging the establishment of separate savings accounts for short-term financial needs can reduce the likelihood of withdrawals from retirement accounts. A financial cushion can provide peace of mind and lessen the urgency to access retirement savings during emergencies.

The significance of tackling abandonment risk

Addressing retirement savings abandonment risk is a critical component of long-term financial planning, and financial professionals play a central role in helping investors manage their retirement strategies. This is particularly true during periods of market stress, which have been shown to disrupt contribution and investing behavior. In fact, left unaddressed, abandonment risk can lead to adverse outcomes not only for individual's retirement, but also for the broader economy, as reliance on public resources grows with an aging U.S. population. Recognizing the structural and behavioral drivers of abandonment risk, and implementing strategies to help retirees stay on track, can make all the difference in delivering successful retirement outcomes.

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In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Principal Investor Management (DIFC) Limited and the other member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.