Monday, February 02, 2009

The Comeback Calculator

I just noticed this on the NY Times website: an interactive graphic where you can calculate how long it will take your portfolio to rebound to its peak level before the crash. I tried running the numbers for my 401k, which I think peaked at about $200k, maybe a bit higher. For me to reattain that level in 2 years, the market would have to have annual returns of 20%! Not bloody likely!


More realistic, though still optimistic at this point, would be annual returns of 5%-- that means it would take 4 years to regain my former peak.


It's also interesting to play with small changes in the annual rate of return to see how it affects the account balance after 30 years-- at a return of 4%, I'd have a little over $1 million; at a return of 6%, I'd have over $2 million. And in my bizarro-world scenario of 20% annual returns, I'd have about $140 million. Leaving aside that craziness, it's amazing that seemingly small differences in market returns could make such a dramatic difference in my retirement lifestyle!

Of course, this is just my 401k, where my contributions are limited. I'm also not taking any extra employer contributions into account. But still, it's scary. When the market drops so rapidly and becomes so volatile, it's tempting to think it could rebound as dramatically and quickly... but that just isn't the way it happens...

7 comments:

Anonymous said...

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Mike said...

Great link, but truly depressing. Something really telling to me is on growth alone without additional contributions, it would take me the rest of my life to get back what I had before. Yuck!

mOOm said...

20-40% returns are actually very likely in the first 2 years after a major market decline. After that the rate goes down to 10% and then with the negative years the whole thing averages out over decades to about 10%...

Anonymous said...

I was playing with that calculator earlier. It was depressing to see how long it would take me to earn back what I've lost, but it was reassuring to see that (according to the calculator), even with just a 4% annual return, I should still hit $1 million, and with a 6% annual return, I could hit $2 million (which I expect to be the modern-day equivalent of $200,000 by the time I retire...).

frugal zeitgeist said...

Thanks for your valuable information.

It was really of use to me.

Now I'm going to go drink myself silly.

Andrew Stevens said...

Moom is correct. The historical data does in fact show that markets can easily rebound as dramatically and quickly as they declined. The S&P 500 Total Return Index declined 22% in 2002, its worst year (until 2008) in decades, but then rebounded 29% in 2003. In 1995, it went up 38%, 23% in 1996, 33% in 1997, 29% in 1998, and 21% in 1999 before the less dramatic busts of 2000 (-9%), 2001 (-12%), and 2002 (-22%). I.e. the opposite happened. The market ran up with hugely dramatic gains (1995 was a bigger gain than 2008 was a loss, when it lost 37%) and then declined.

That doesn't mean it's the way it will happen this time, but you are mistaken in thinking that isn't the way it has happened. Markets are unpredictable.

stackingpennies said...

I'll rebound quickly, but only because I never was all that high to begin with. Even if the market stays absolutely flat, my contributions would rebound me this year.