Okay, where were we?

Okay, where were we?

Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.

Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?

Friday’s answer: It doesn’t matter, even if it happens at the end of the period when the 30% loss will cost you in excess of $41,000, dropping your then nearly $137,000 nest egg to less than $96,000. In the first year, it would have cost only $3,000 (30% of $10,000), but that is $3,000 that would no longer available to grow for 34 years at 8% compounded annually, ending with a value of (guess what) about $41,000. You would end up with the same amount no matter when the loss occurs.

Wednesday’s second question: In your actual retirement investing, do you care when the inevitable losses come – before, at, or even after your retirement?

Yes, you do care. At least, you should care. As most retirement experts will tell you, you have to invest more prudently in retirement because your ability to recover from a financial set-back is increasingly limited. Your earned income has slowed significantly or stopped, so you can’t double-up your saving rate to catch back up. And, you probably have been tailoring your life style to the anticipated size of your nest egg, so a sudden drop in value just before retirement can be particularly difficult to adjust to.

But, there’s another aspect. The losses (and gains) that matter the most are those that happen when you have the most money invested.

Wait. Isn’t this what we just disproved with our answer to the first question?

Nope, this is different. Think about it. We’ll pick this up again later.