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.
A lot of retirement plans are tied up in various investments, often stocks whose value can go down if their companies’ profits do. That affects retirees who have no choice but to periodically withdraw their funds to cover monthly living expenses; they have to eat the loss when they do.
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