Earn What You Spend

It’s a way to calculate how long it will take you to earn back all the money you’ve lost in this stock market crash. What we often forget is that even if a market drop is followed by outsize returns, it is quite difficult to regain your previous position. 

Say you invested $100 last year and it dropped 10% in value. Then, the next year it gained 10%.  You’re back to where you were, right?  Not quite - you are back to $99.  So you need larger percentage gains to offset your original losses. 

Which brings us to the NYTimes calculator.  I played around with the default settings - last year our portfolio was worth $100,000, and now it is worth only $60,000.  How long before we are back to $100,000?  Assuming fairly robust gains of 8.2% - which is far, far from certain in this market - it will still take four years to get back to where we were. 

 

Four years is pretty bad.  But this overlooks a key factor in this calculation - how much you contribute yearly.  Under this assumption, we are putting an additional $5,000 away each year, and it still takes us four years to regain the loses.  What if we don’t invest additional money - how long before you are back to where you were?  10 years.  

If anyone is uncertain of why losing any amount of money is so damning for those nearing retirement, or simply needing liquidity, just spend a few minutes with this calculator.  It is sobering.