Can Your Retirement Savings Survive Another Market Crash?

Roller-Coaster-Ride-Again-1024x1024You might think the answer to that question depends on how much time you have before you retire, and in a way, you’d be right. Conventional wisdom states that the younger one begins saving for retirement, the more time they have to recover from a loss or multiple losses. However, the truth is you can never recover what has been lost. That money is lost forever. All you can do is earn a return on the money that is left in your account(s).

If you lose a dollar you didn’t have to lose, you not only lost that dollar, but what that dollar could have earned if you hadn’t lost it.

Whenever you lose money in your savings accounts, which includes your retirement accounts, you interrupt the compounding cycle. The advantage of compounding is that your money earns interest and, if it is reinvested, your interest will earn interest. Each of us has one compounding cycle in our lives, which is essentially a 30 to 40-year period of time that begins when we start earning income and continues through until we stop earning income. There are three phases of the compounding cycle: 1) accumulation, 2) growth, and 3) take-off. Most of the growth takes place in the take-off phase and the later in life we start our compounding cycle and the more times we interrupt and reset our compounding cycle the less we benefit from that compounding.

Retirement savings are typically invested in stocks, bonds, and mutual funds. While the stock market has been reaching new highs over the last few years, which is largely the result of the safety net provided by the Quantitative Easing stimulus programs offered by the Federal Reserve, the huge sell-offs in the stock market every time the Federal Reserve hints at withdrawing its stimulus or mentions its intention to raise the Fed Funds Rate show the vulnerability to loss of assets invested in the stock market.

We’re told by the talking heads in the financial media that we shouldn’t be concerned with the short-term ups and downs of the stock market because saving for retirement is a long-term investment, and over the last 30 years the stock market has averaged a return of 10.59%. The problem with that philosophy is averages lie! Average rates of return do not equal actual rates of return.

Cold Water vs Hot Water

Do you know the difference between average rate of return and actual rate of return? You should because it can make a huge difference in your account value. Generally speaking, averages are typically used to distract investors so they don’t notice the stock market’s losing years, or at least don’t panic over them and sell everything in their portfolio, much like a magician uses sleight of hand to distract an audience so he can perform his illusion.

Stock Market Drop 1From 2000 to 2002 we saw the stock market lose an estimated 46% of its value and from 2007 to 2009 it lost an estimated 59% of its value, and that’s just in the last 15 years. The financial media was dominated with stories of Americans close to retiring that had to delay their retirement as a result of the losses their portfolios suffered. Worse than that were the stories of retired Americans that had to go back to work as a result of the losses their portfolios suffered.

The continuous ups and downs of the stock market can lead to feelings of anxiety and result in unnecessary financial stress, which is linked to a host of other physical and mental issues, in addition to the strain placed on relationships.

Consider these questions:

  • Has your portfolio been adversely affected by a stock market correction?
  • Is your account value today more, less, or the same as before the loss?
  • How many years did you lose waiting to get back to where you were before the loss?
  • How will your retirement plans be affected by the coming correction?

If you would like to discuss methods for protecting your retirement assets from market volatility and market losses call us to schedule a time to discuss your specific circumstances.

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