retirement

Stock Market Losses or Lower Returns: Which Is More Dangerous to Your Retirement?

One eye-opening, simple math equation can clearly show retirement savers the answer to that question, and if you are among those investors who take pride in their high-performing portfolios, you may be surprised.

Do you want to make your savings last throughout retirement? If you do (and of course you do), I believe that once you are within five years of retirement, you need to invest more conservatively than you did while you were growing your savings. But in most cases, a more conservative approach translates into lower returns. Is it a worthwhile trade-off?

I believe so, and I’d like to illustrate my point with a question: If you lost 50% of your money in a bear market, how much would you need to make to get back to even? Did you say 50%? If so, you’re in good company: When I ask this question during seminars, that’s usually the answer I receive. It’s also a wrong answer. Let’s do the math:

How a 50% Gain Can Result in a $250,000 Loss

If you had $1 million saved for retirement and lost 50%, you would have $500,000. Ouch. If you made 50% on that $500,000, you’d make $250,000, which would bring your total up to $750,000, not $1 million. You’d need to make 100% to get back to even.

And if you did need to make 100% to get back to even, how long would that take you? At 2% per year, it would take you 35 years to recover. If you made 6% per year, you would need 12 years to get back to even. Even if you made 10% per year, it would still take you seven years to recover your money. And what are the odds you’d make 10% every year for the next seven years? Sounds like a pretty high expectation to me.

How Realistic Is a 50% Loss?

That's the cost of losing money, and that’s why I believe losing money is more dangerous to your retirement than lower returns. Yes, losing 50% of your money may be an extreme example, but people have lost that much, and in recent memory. The S&P went down almost 50% in the Y2K bear market, and dropped 57% in 2008.

One more factor to consider: I don’t believe many retirees can afford the time cost involved with waiting. If you were retired and living on your investments, would you be able to drastically cut your cost of living while you were waiting for your money to come back to even?

What People Near Retirement Should Do

In my opinion, the best way to make your savings last is to employ a conservative investment approach once you’re within five years of retirement. That approach should include:

  • Taking only as much risk as is necessary to accomplish your financial goals.
  • Employing a strategy that can protect your investments during bear markets.

Yes, those tactics may result in lower returns. But as I think I’ve shown, the cost of lower returns can be worth the cost of protecting your retirement.

About the Author

Ken Moraif, CFP®

CEO and Senior Adviser, Retirement Planners of America

Ken Moraif, CFP, is CEO and senior adviser at Retirement Planners of America, a Dallas-based wealth management and investment firm with over $4.3 billion in AUM and serving over 8,000 households (as of May 2019). He is also the host of the radio show "Money Matters with Ken Moraif," which has offered listeners retirement, investing and personal finance advice since 1996.

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021

Recommended

Your Doctor is Retiring. Here's How to Find a New Physician
health insurance

Your Doctor is Retiring. Here's How to Find a New Physician

More doctors are considering quitting due to burnout from the pandemic. If you must find a new physician, get recommendations from friends and review …
September 24, 2021
Tax Changes and Key Amounts for the 2021 Tax Year
tax law

Tax Changes and Key Amounts for the 2021 Tax Year

Americans are facing a long list of tax changes for the 2021 tax year. Smart taxpayers will start planning for them now.
September 23, 2021
You’re Being Robbed … You Just Don’t Know It
retirement

You’re Being Robbed … You Just Don’t Know It

For retirees especially, inflation risk should always be a top concern in your financial plan.
September 22, 2021
10 Ways You Could Avoid the 10% Early Retirement Penalty
retirement

10 Ways You Could Avoid the 10% Early Retirement Penalty

You’ve saved diligently in your 401(k), and you wouldn’t mind tapping into it – but you’re not age 59½ yet, so you could have to pay the IRS a 10% pen…
September 21, 2021