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Missed Fortune – Lessons of the Lost Decade

Posted on | June 10, 2012

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The Amazing Vanishing Retirement Money Trick

Those who wish to take ownership of their financial future would be wise to take a quick look behind them at the lessons of the Lost Decade.

Between the years 2000-2010, people whose retirement savings were directly in the market saw two huge market contractions that cost them dearly. From the end of 2001 to the end of 2003, a person with $100,000 invested saw their nest egg’s value drop to just $60,000. If they had a million dollar nest egg and were getting ready to retire, they saw the value drop down to $600,000.

It took four years, until 2007, to recoup what they lost and then in 2008 the market took another 40 percent tumble. If they hung in there, it took until January of 2011 to recoup the loss they took in 2008. But many people chose to play it extra safe, put their money in the bank where it was earning perhaps just 1% and they still aren’t close to breaking even.

The Lost Decade saw five up years and five down years, but two of those down years saw 40% declines. By having their money exposed to risk by being directly in the market, many Americans lost ground during that decade and for many, it felt as though they’d lost their future as well.

Had these folks used the indexing strategy like our Missed Fortune clients, they would have weathered the market dropping after 9/11 and again in 2008. They might not have made much money in those down years, but with indexing they wouldn’t have lost any of their principal either. They would have simply eliminated those five loss years and captured the maximum-capped return of up to 15% for those gain years that the market recovered and grew.

Instead of slogging along earning 0% for those 3 years after the terror attacks, they could have been safely earning a guaranteed 4.5 to 5% return in a tax-free vehicle for a 9.62% rate of return. This means that your $100,000 nest egg would have grown to $260,000 and your million-dollar nest egg would have grown to $2.6 million instead of just barely coming back to break even.

Those that used this indexing strategy doubled their money. Those who didn’t are still trying to catch up from the lost decade.

Indexing Can Make All the Difference

The highly respected analysts at Delbar have revised their latest numbers of how most stock market investors have fared over the past 20 years and they say the average return was only 3.49%. This is why so many brokerage firms and retirement specialists are telling people that if they have their money in the market, the should only count on a retirement income payout of about a 4% rate.

This means that if you have a million dollar nest egg, you should only be taking out roughly $40,000 a year in income. The worry is that if people take out more than a 4% payout, they stand a good chance of depleting their retirement nest egg.

We also need to keep in mind that even at today’s tax rates, not counting the likely higher tax rates we’ll face down the road, you’d only net around $33,000 in actual income. But consider that with the right indexing strategies, a nest egg of only $425,000 could generate the same amount of income, predictably and tax-free. Best of all, you could do this without the worry of depleting your principal prematurely.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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