With the epic downturns in the economy I have wondered what this really means for my 401k. I know everyone says how “You are in it for the long haul”, “Don’t Worry you are buying cheap” etc. etc. etc.. Are they telling the truth or are they full of Poo? I ran some numbers of my own, just to see, and I was surprised by the results. First lets look at a younger investor who is currently 25 who had $40,000 invested prior to the downturn in the economy and continues to invest $10,000 per year. If you use a standard retirement planner’s number of 8% yearly return over 42 years he would have $4,056,000. If you throw in one -42% year followed by one -5% year at ages 25 and 26 that same person ends up with $3,493,000. That is a difference of over $500,000.
This really doesn’t look that bad, it is half a million but it isn’t that bad. Lets look at the same individual but lets place those two down years at years 20 and 21 instead of 1 and 2. He is going to end up coming out with around $2,230,000, that is $1,825,000 less than the 8% estimation. They don’t show you that graph before you sign up to max out your 401k.
In both scenarios the average gain is 6.5% but as you can see there is a large difference between the ending cash value. When retirement planners and investment professionals pitch you these market averages, they don’t explain the massive negative impact losses can have on your investment if they come even mid way through your investment period.