As you’re nearing retirement, there are 3 risks you need to take into consideration when planning your retirement.
Stock Market Volatility,
1. Stock Market Volatility. Let’s say you were to invest $100,000 into the stock market. The first year you lost 30%. How much do you think you would need to earn the following year to get back to your original $100,000? If you lost 30% in the stock market this year, next year you would need to gain approximately 42.8% to get back to your original investment. The reason is because you’re earning interest on less money. In this example, you only had $70,000 in that second year to invest rather than $100,000 so you need to earn 42.8% rather to get back to your original amount.
If you were to invest $100,000 over the last 17 years into the stock market since the end of 1999 to the end of year 2016. Over this period, you can see we had some up’s and down’s. Some bear markets and some bull markets. The first few years were a loss, but it looks like we gained back some. It took us quite awhile to get back to that original amount.
Then, we had a huge drop in 2008 which I’m sure many of you can remember, and we’ve been working our way back up. The account is a little above $150,000 when it’s all said and done. Which means, over this 17-year period, your account has had an average annual rate of return of about 3.1%.
Now, 3.1% is not terrible. It’s definitely better than having a negative, but what we haven’t done yet is calculated all of the expenses that are associated with this account. Things like management fees which could be anywhere between 1%-2%. Inflation is another thing to consider. The average has been about 2%-3%. And…taxes! When you factor all of this into the account, you end up with a number more like 0%.
And I assume if I were to ask any one of you if this is the number you feel you’ve made over the last 17 years in the stock market, you would agree. The stock market has been going up for close to 10 years now and has been hitting a series of historic highs. But as recent events show, the market is not always a one-way street to prosperity. So perhaps the most obvious risk to your retirement nest egg is another 2008-style market collapse, when the market declined almost 40 percent, or even worse, a three-year decline like what happened from 2000 to 2002. Nobody can predict when the next bear market will come along and cripple your IRA or 401(k), but you need to be prepared when the next one does show up. Take care to select investments that will generate a steady income, and take steps to avoid outliving your money. That’s why it’s so important to make sure you’re managing your portfolio’s volatility as those negative years could have a big impact on your overall retirement outcome.