Recoup Your Lost Savings

Regardless of whether you are saving for retirement, your children's college education or another long-term goal, your account balance is probably a lot smaller now than it was in October 2007.

The stock-market meltdown and the surprising, simultaneous sharp declines in many parts of the bond market reduced the wealth of Americans by trillions of dollars. From October 9, 2007, through March 9, 2009, Standard & Poor's 500-stock index plunged 57%, making this the worst bear market since the Great Depression. As a result, many have seen 30%, 40% or even 50% of the value of their portfolios disappear. The horrible performance has disrupted retirement-savings plans, as well as many parents' college-savings plans.

In the two months since March 9, stocks have staged a powerful recovery. Still, many people have a burning question: How long will it take to recover the rest of my losses? We've created an easy-to-use calculator to help you find the answer. Simply tell us how much money you had in retirement savings (or college savings and the like) before the markets tanked and how much you have now. Then answer these two questions:

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• How much will you be able to sock away each year in savings (we supply the contribution limits on the most commonly used retirement-savings plans)?
• How much do you expect your investments to earn (we supply historical guidelines)?

TRY OUR CALCULATOR

Our calculator will give you an estimate of how many years it will take to recoup your lost savings. So, for example, if you lost $30,000 of your $100,000 nest egg, but you expect to be able to save $5,000 a year and think you can earn 8% on your investments, our calculator shows it will take three years to get back to where you were in 2007. (Actually, it would take two years and four months, but to be conservative, we round to the next year.)

Have a time horizon in mind? You can use our calculator to get a handle on how much you need to save each year - at various rate-of-return expectations -- to achieve your goal of recouping your savings at any time you choose in the future.

So let's say you expect to retire in six years and your 401(k) is down from a peak of $400,000 to $250,000. You're confident that between your own contributions and a company match, you can add $12,000 of new savings each year to the account. Our calculator shows you'll need to earn 4% annually on your investments to recoup your losses by the time you retire. (Not to depress you, but the $72,000 of new savings plus all the earnings inside the account will just get you back to the $400,000 level, which may be far less than you had hoped to have six years from now.)

The simplicity of our calculator comes with a few caveats. First, we use current dollars, meaning the future account balances are not adjusted for inflation. And we do not take taxes into account. That doesn't matter if you are saving in a traditional IRA, 401(k) or other tax-deferred retirement or college-savings plan. But if you are saving in a taxable account, our calculations assume you pay the bill on any taxable earnings with separate funds rather than dipping into the account to settle with the IRS.

Finally, your annual contribution for new savings is calculated as if it were deposited as a lump sum at the beginning of the year. If you make monthly contributions of one-twelfth of your yearly amount -- as is the case with most 401(k)s, for example -- the result will understate the time you'll need to recoup.

The goal here isn't precision. It is to replace despair, which too often can be paralyzing, with the invigorating knowledge that recovery is possible.

You can use this calculator as many times as you like, experimenting with different combinations of contribution rates, rates of return on investments, and years of saving for a variety of your financial goals.

Try it once, for example, assuming no additional savings and a rate of return of 2% that you might earn in a money-market mutual fund. You'll see how far staying on the sidelines can push back the achievement of your goal. Now, try it again with a higher yield -- say, 7% or 8% -- that you might expect by adding stocks to your mix. Then see how you can speed up your financial recovery by adding $5,000, $10,000 or more to your savings each year.

Try it.