Baby Boomers Protect Your Nest Egg – Avoid Large Losses

As Baby Boomers we must protect our Nest Eggs in Retirement by avoiding large losses. Why is this?

For this article I have assumes a 10% loss because it appears the average loss in stock Mutual Funds for the first quarter of 2008 is 8.8%.

“U.S. stock mutual funds plunged 8.8 percent in the first quarter, the most in more than five years, as technology and financial stocks succumbed to the slowing economy and a lending pullback. ”

One of the best articles on how long it can take to recover a large loss was written by Craig L. Israelsen entitled The Math of Recovery in Retirement Portfolios. He compares the investment returns needed to recover from losses when in retirement vs. when working and owning a “Buy and Hold Portfolio”, over periods of one to five years.

The article makes many good points and is recommended reading, but this post will only cover the percentage return needed to recover from a 10% loss.

Here is the table for the Buy and Hold Portfolio. No pension is taken.

Portfolio Loss Recover in 1 year Recover in 2 years Recover in 3 years Recover in 4 years Recover in 5 years
-10% 11.1% 5.4% 3.6% 2.7% 2.1%

Here is the table for a Baby Boomer in Retirement and drawing a 5% pension increased by 3% each year.

Portfolio Loss
drawing pension
Recover in 1 year Recover in 2 years Recover in 3 years Recover in 4 years Recover in 5 years
-10% 23.7% 14.4% 11.5% 10.1% 9.4%

From the two tables you can see there are significant differences in the percentage returns required to recover the lost capital. For instance if is to be recovered in three years we need to get a return of 11.5% on the balance of our Nest Egg each year for three years. Compare this to only 3.6% if the Nest Egg is not paying you a pension.

Many Baby Boomers who retired in 2000 suffers losses of 30-40% on their Nest Eggs. It took until 2007 for them to get most of their capital back to what it was in 2000.  Now they have been hit with another loss of 8.8% for the first quarter of 2008. Most Mutual Funds do not avoid losses. As Baby Boomers in retirement we need to put in place systems to avoid large losses if our nest Egg is to survive as long as we do.

5 Responses to “Baby Boomers Protect Your Nest Egg – Avoid Large Losses”

  1. […] can control when you exit a market. The first rule in retirement is to avoid large losses so you need to have a stop loss strategy in place. You and your financial planner should work out […]

  2. […] It is unacceptable to me to be told I will just have to stop taking a pension if my nest egg suffers significant losses because of a flawed Buy and Hold strategy in retirement. Rule #1 in retirement is to avoid large losses. […]

  3. […] I don’t think the message is getting through to financial planners any more than it is getting through to bay boomers. That message is Baby Boomers have to observer and respect Rule #1 – Avoid Large Losses in Retirement. […]

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