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
Once you retire, you live on the interest accrued on your retirement account **and by taking money out of that retirement account**. If the interest you earn is low (or even negative when you account for the market crash), then you have to withdraw more to cover your costs, and withdrawing money means permanently reducing the interest you can earn the following year.
Okay real numbers. You need $50,000/yr to live comfortably and go on vacation sometimes with your grandchildren. You’ve got $1,000,000 in your retirement account. Awesome. That’s 20 years of expenses covered even without interest. You’re 70 years old. This is good.
Fast forward. $850,000 in the account. 73 years old. Cool cool.
Market crash! $425,000 in the account. Jesus fuck. 73 years old.
You skip vacation and cut other expenses. $390,000 at 74.
$360,000 at 75
$330,000 at 76
Miracle market recovery! $660,000 in the account. 76.
Even though the market halved in the crash and doubled in the recovery, you’ve lost almost $200,000 in 3 years. Living like crap and skipping vacation and missing out on theme parks with your grandkids, and at the same time, your bank balance looks like you’ve been spending $66,000/year.
And if the market didn’t recover, you’d live like crap and run out of money at 87.
And if you spend like you’re used to, you’ll run out of money at 82.
I used big numbers to make the math easier. Most people don’t have $1,000,000 in the retirement account.
Run the same exercise with a starting balance of … 401k and you’ll see just how devastating this could be.
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