Market Recovery Program
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Chapter 6
Ladies and Gentlemen: Joe
Who’s Joe?
Joe is 50 and, prior to the downturn, had $400,000 in his 401(k). He was planning on leaving the funds untouched until he was 70. Because most 401(k)‘s are rolled over into individual retirement accounts (IRAs) at some point, Joe was planning on drawing on the funds at age 70 when IRA rules require minimum annual distributions.
Pre-downturn, Joe was hoping his $400,000 would grow to an even greater amount over the next 20 years. Now Joe will be happy if, by the time he turns 70, the $100,000 he’s left with will just get back to $400,000.
So Joe’s goal is to increase his account from $100,000 to $400,000 in 20 years?
Yes. And please note: Joe may have lost 75 % of his 401(k)’s value but he’s got to gain 400% on his $100,000 to get back to $400,000.
Gosh, going back up to where you were requires a much greater number in terms of percentage than coming down!
Yes.
Now, let’s make those numbers from the last chapter more realistic and reflective of Joe’s situation.
What we’ll do is add 3 zero‘s to the 400 to make it $400,000. Let‘s also make it reflect Joe’s situation by reversing the process. See Figure 4.
Figure 4
Combining the information in Figure 3 from the last chapter and Figure 4 in this one, I see that at a 4% annual compound interest it will take 36 years for $100,000 to become $400,000...is that right?
Yes. And notice that it didn’t take Joe 36 years to go from $400,000 to $100,000...it took 14 months!. See that?
Yes I do…and it’s quite depressing!
So, the big question is: how long would it take Joe to get the $100,000 to grow back to its original $400,000 by the time he‘s 70, in 20 years? Can he quadruple his $100,000 in 20 years? How long will it take and, most importantly, how can he do it?
Well, we do know how long it would take at 4%, whatever we put it in, don’t we: it would take 36 years, because that’s what the Rule of 72 tells us.
Yes.
But that’s unacceptable…Joe doesn‘t have that kind of time. That was Joe’s nest egg and he was planning on using that money long before 36 years elapsed.
What will speed up the recovery time from the 36 years? A better interest rate?
Hmmm…you may be on to something there!
Why don’t we take a look at a Compound Interest Rate chart…
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