Hello there! I am trying to become financially literate this year. I have listened to a bunch of people refer to the 2008 economic downturn, and how it set back their retirement savings.
I was 8 at the time, so I don’t have much life experience in economic recessions beyond COVID.
I understand that if you have retirement savings (401k or IRA), the money is invested in the stock market. When there is a downturn, those assets are worth less. But retirement accounts are long-term, so wouldn’t the assets just regain their value after an economic recovery? Why would it set you back permanently? Can’t you just wait?
Thank you! 🙌
In: Economics
Your instincts are basically right about retirement savings being for the long term. The problem is primarily for people who had a shorter time horizon. The market was fairly flat for most of the 2000s, then it dropped significantly in 2008-09 and didn’t come back significantly until 2012. That’s a 10+ year period with fairly limited returns. The Dow, for example was over 11,000 in early 2000 and just over 12,000 at the start of 2012, which is less than a 10% total return over 12 years. Someone banking on the long term average of around 8% would have nearly doubled their money, so a 53 year old with $500,000 in a 401k in 2000 could reasonably have expected $1 million in 2012 (ignoring additional contributions) and would instead have had $550,000. If that person started drawing in the early 2010s and generally converting to safer investments to limit future risk, they would have missed the future gains. However, a younger person who is still in he market would have a nearly 4x return since 2000 with the Dow just under 40,000 today.
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