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
Relative to a world where that downturn never happened, the account certainly has less value given that we live in a world where markets did fall. However, this is somewhat wishful thinking – the values of the stocks were artificially too high prior to the downturn. If the market were perfect, we likely would have gotten to the same place we’re at now, just with both less down *and* less up.
But there are a few other ways that an acute economic downturn can have a lasting impact on retirement savings. First, a loss or reduction of income usually translates to less retirement savings. You can’t put money into your 401k when you don’t have a job or need your entire paycheck. Some people may have even dipped into their retirement accounts to make ends meet – something you *can* do but suffer heavy penalties for.
Second, not everyone is a position to wait for retirement. If you were intending to retire in 2008 and start drawing from your savings, that would mean locking in those deep losses – at least for a few years. This drove at least some older people to work for longer than they were intending or have a more modest retirement. This is most obvious for people who were just about to retire, but it also had a smaller effect on people intending to retire in the next 5-10 years.
Latest Answers