Investing for Retirement: Why it’s Different This Time

retirement income

Investing for retirement today is different than it was in the 1990’s.

Four words that should raise a red flag for investors are “it’s different this time”. However, for people over a certain age, when it comes to investing for retirement. Here’s why:

#1)It was the 1990’s

The 10-year period ending in March of 2000 was one of the best market rallies of all time. When you opened your brokerage or mutual fund statement your balance was often about the same or higher than the last time you looked. According to MorningStar, the S&P 500 experienced only one losing year during the 1990’s. The year 1990 saw a loss of 3.2%. Compare that to the 10-year period that followed when the market posted losses in 3 separate calendar years, the worst being 2008 with a loss of over 37% for the year.

#2)Time was on your side

Back then you had decades before you needed your retirement money. Now you have years. Or in some cases months or even weeks before you need to begin taking distributions from your retirement accounts. “Long-term” suddenly isn’t so long anymore. While some of your money should be invested for a time period that can be measured in decades, some of your money may need to be accessible during the next few years.

In the 1990’s, a drop in market values might not have changed your target retirement date. However, if you were contemplating retirement in 2008, the market sell-off likely postponed your retirement by 5 years or more as you worked and waited to recover market losses. In the early months of 2013, the Dow once again exceeded previous highs, finally gaining back much of what we lost when market sold off in 2008.

#3)During the 1990’s markets were less volatile

A 100 point swing in the Dow Jones Industrial Average used to make my phone ring. “Mike, did you see what happened in the market today?” clients would ask.  These days a 100 point swing in the market doesn’t even move the needle for many people. In fact, 200 point drop on the DJIA rarely motivates clients to pick up the phone.

In 2008, the S&P 500 lost over 21% in one quarter. During the fall of that year, investors experienced market losses that were some of the worst in history. On September 29, the Dow Jones Industrial Average lost 777 points, nearly 7% of its value, in a single day. Now that’s volatility. (Historical Index Data – WSJ.com: All time Largest One Day Gains and Losses)

#4)These days you have more to lose – a LOT more

In the 1990’s it was fun to see your small IRA balance grow over the course of the decade.  If the market lost 3.2% as it did in 1990, you lost a $320 on a $10,000 investment. Disappointing, but not devastating. These days your account value swings by more than that amount every day, even on a normal day. In fact, a 2% drop in the market today might cause your account to lose more in a day than your entire net worth was 20 years ago. Market losses like we had in 2008 could set you back years.

So if investing for retirement is different this time, how does that affect your retirement plans?

In my next post we will talk about how you should reflect these changes in your retirement planning.

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