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
> 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?
Someone’s retiring every day. If the stock market wipes out their retirement today, they can’t retire. Or they can, but they won’t have enough savings and are going to have to find employment. If the recession’s recovery takes 5 years, that means everyone who was going to retire for 5 years either has to wait or find post-retirement employment. If the recession’s recovery doesn’t quite make it back to 100% of where it was, they have permanently lost retirement money.
You also have to reckon that once you start taking money *out* of retirement and not putting money *in*, you have a problem. It *was* growing because money only went in. But now in addition to the returns from investments, you are taking money out. If the market isn’t doing well enough, you’ll be taking more out than the investments are making. That means you start slowly losing money, and every withdrawal makes you lose money a little more quickly until suddenly you aren’t sure if the money will last the rest of your life anymore.
Imagine you had like, 30 years of money saved up and a recession destroys it down to 3 years. Maybe the recovery happens in 2 years. But you have to figure if the “bad part” took 1 year, you lost 1/3 of your remaining savings before recovery started happening. So even if it was a perfect, instantaneous recovery, in 1 year you lost 10 years of retirement savings, and you’re in the sort of financial condition you were hoping it would take at least 10 years to reach. If another recession happens you’re broke. And they’re happening about every 5-10 years now.
And if you’re 65 in a highly skilled position, you can’t just ask your boss to let you work 8 more years while the economy sorts itself out. If you start showing diminished productivity because of aging, they’re going to have to fire you.
Worse, if you can stay, odds are someone was going to be promoted to your position after you retire. But now you aren’t retiring. Now that person’s making less money without the promotion, which means they’re putting less in THEIR retirement, so now they’re kind of getting double screwed.
Further, every company I’ve worked for has had as a benefit a “match”, some percentage where if I put that much into my retirement they’d put in that much too. It’s free money. It’s also one of the first benefits every company I’ve worked for has cut when a recession starts, because it doesn’t hit people as hard as a salary cut.
And you have to figure if people can’t stay, and have to find post-retirement work, now they are taking jobs OTHER people could be taking. Those people need those jobs so they can save for retirement. But if they can’t find a job because too many retirees are competing with them, they’re both unemployed and not saving for retirement…
## Really short answer:
“Long-term” doesn’t help you if you are retiring this year and your savings has been hit so hard you realistically only have 2-3 years of savings left. You’re 24 right now so you’ve still got 8 or 9 recessions before retirement. Imagine you’re 64, already planning the retirement party, and already worried things are going to get financially rough when you’re 75.
Latest Answers