Our retirement investments were destroyed when the market crashed

English: Crowd gathering on Wall Street after ...
Wall Street after the stock market crash of October 1929. (Photo credit: Wikipedia)

The idea that retirement savings were destroyed in the market crash of 2008/2009 is a popular idea. I receive many comments in the context of Social Security benefits, the COLA and retirement to the effect there is no hope because the market crashed five years ago. Many people accept the notion without question that they are the victims of the evil people on Wall Street, the 1%, and the stock market.

The truth is that many Americans are likely the victims of their own poor planning, lack of financial sophistication or simply their failure to pay attention to what is happening around them. When I was managing 401k plans it was a given that many people would consistently move their investments out of stocks the minute there was a decline thereby locking in losses. They failed to take a long-term perspective or to focus on their real financial goals. The natural result was consistent disappointment in their 401k plan. The more serious consequence was a disappointing retirement and worry about the next Social Security COLA.

I am partially guilty of this investing approach myself; taking a too conservative perspective for investments after I retired. Thankfully, I have a son-in-law with more investing savvy who convinced me to take a more aggressive approach with a portion of my savings. Persistence pays though because even with a large portion of fixed income investment choices since I retired in January 2010, for every dollar I had then I have $116.50 today … and if I had been wiser, it would be quite a bit more.

Now as for those folks who blame the market crash for their current retirement woes, I say look in the mirror and then at the mix of your investments, what you did with investments in 2009, your timeframe for using your savings and the facts.

Following are charts showing the performance of three key market indexes over the last ten years. Note especially the extent of the recovery from the 2009 crash. Staying the course would have recouped any losses and quite a bit more.

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4 comments

  1. This is actually a pretty complicated concept. For someone who has a high tolerance for adverse events and a decent time frame riding downturns out is absolutely the best approach. On the other hand if one’s not got the constitution or time frame to deal with serious market drops one should probably not be aggressively invested in the first place. The tricky part is figuring these things out before the shit hits the fan, which as the saying goes “the devil is in the details.”

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    1. That timeframe thing is misunderstood. The time frame is death, not retirement. Those who say they were wiped out because they were going to retire around 2009 must be assuming they were going to use their entire account at once. That is not the case. While close to or during retirement you do not want to be as aggressive as at age 30 or 40, you do need to generate returns that allow you to withdraw what is necessary while not depleting your balance too soon and at the same time keep up with inflation. The important factor is to have a nest egg to start large enough to get you through downturns and financial emergencies.

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  2. Great article, I guess I made a good choice because lI eft my investments alone and it looks pretty good, although still lower then what I probably need for retirement.
    This is a little off topic but hoping you could provide a little advise. I’m always told to never borrow against your 401K unless you have no other choice. In my situation, I have an option to borrow against my 401K and pay it back with interest of 4.5%. Meaning, I will be paying myself back the interest. So, if I have a couple of credit cards with 7 or higher percent in interest, wouldn’t it make sense to borrow against my 401K, cutup the cards and aggressively pay my 401K loan?

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    1. I can’t give advice, but I will give you my opinion. I agree borrowing from the 401k is generally not a good idea and I certainly agree with paying off credit cards and cutting them up. But in addition to comparing the interest rates, you need to consider the lost opportunity to earn a return on the amount you borrow while it is not in the plan. Also, if there is any chance you will leave the job before the loan is paid off, you will have to repay the money in a short period, probably no more than 60 days (check with your plan) or it will be classified as a distribution and you could end up paying not only the taxes, but perhaps the 10% penalty if you are not 59 1/2 at the time.

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