Have you ever realized that if you lost 50% of your money in one year due to a stock market corrections then it would require a 100% gain the next year to get back to even. Take a look at the math below

Let’s say you have 1 million dollars invested in the stock market, and the market crashes. You lose 50% in one year. Now your 1 million dollars is only worth $500,000.

Many people make the mistake in thinking that because you lost 50% in one year, you only need to earn 50% the next year to get back to even. But $500,000 x 50% is only $250,000 so at the end of the year you have $750,000 whereas a 100% return brings you back to even $500,000 x 100% = $500,000.

Once you are retired you may need to draw money out of your portfolio every year in order to have the lifestyle you want. If you are drawing money out of your portfolio, and at the same time get hit with a serious stock market correction, then you are compounding your problems. It will make it that much harder for your portfolio to get back to even.

This is why it is so important to make sure your income plan is as secure as possible, and why you should consider using both active and passive investment strategies in your retirement investment plan to help try to reduce the overall volatility in your portfolio.

I’ve learned from working with retirees that a 50% gain in one year wouldn’t  really change their life. It just gives them more money and perhaps they take an extra trip or so. But a 50% loss in one year can not only be unnerving but devastating and create a lot of sleepless nights.

The emphasis in retirement should be on income, preservation of principal and earning a fair return to outpace inflation.