BY amfcon No one wants to lose money. Think back to the recession in 2008. It hurt people of all ages and many Americans’ retirement accounts. In-jokes like “It turned American 401(k)s into 201(k)s” became the latest trend. And, in truth, the nation’s 401(k)s and IRAs lost about $2.4 trillion in the final two quarters of 2008.
Whenever I calculate return percentages, it always starts from the beginning to the end. I mean from the starting value as the base. If my investment is $100,000 and the market rose 20%, I have gained $20,000. A 20% decline would put my investment at $80,000. Since it will take a $20,000 gain to get back to $100,000. Dividing $20,000 by $80,000 shows me that it would be a 25% gain to recover from the loss.
**Compound interest: a 30% drop needs a 42.85% recovery. (30/70 = 0.4285). But 10 percent a year compounded for 4 years puts the account back into profitable territory.
Let’s see an example for each: S & P 500/402(k) and IUL Investment:
(1) S & P 500/401(k): Let’s say John invested $2,000 in his 401(k) plan, as shown in Graph 1(a). When the market rises by 20%, he has $2,400 in savings. In a few weeks, the market fell 20% and lost $480. Now he has $1920 in savings. The next day, the market spiked back up 25% and now he has $2,400 in savings. He recovered from his losses.
(2) IUL Investment Plan: Let’s say Ron invested $2000 in an indexed retirement savings account shown in Graph 1(b). When the market rose 20%, he had $2,400 in savings. In a few weeks, the market fell by 20% and he lost $0. He did not lose any money. The next day, the market spiked back up 25% and now he has $3,000 in savings. He has $600 more in his account than John’s account.
