Should I keep investing in my Roth IRA?

[FrugalIII]

I'm 54 years old. The value of my Roth IRAs have dropped by about 40% this year. I recieve a defined benefit pension from my previous employer but still work elsewhere. I plan to use my Roths only as a supplement in about 6 years when I do retire for good. Since I have just a few years left before I retire permanently, should I keep investing in the Roths hoping that they don't keep losing money or should I take the money I would be investing and put it in my savings account that currently pays 3.25%? I doubt I'll live long enough to get the 40% back I've lost this year.

[jIM_Ohio]

My Roth has lost 40% too. I hve gotten about 10% of it back over the last week or so. Have you?

How was the Roth allocated?
How much are you anticipating taking from the Roth at age 60?
How long do you expect to live past age 60?

You have a pension- what % of your expenses will that cover?
Is the Roth making up 100% of the difference?
What is your retirement plan?

In short, don't sell Roth assets. You want the tax shelter. If you buy more now (with new deposits) you will lower your break even point.

I would look into how the Roth was allocated (were you taking too much risk for such a short time horizon) and work backwards from there before selling anything.

[disneysteve]

How long do you expect to live past age 60?

Retirement planning would be SO much easier if we all knew the answer to that question.

Too bad we can't be like Stephen Wright: "I know when I'm going to die because my birth certificate has an expiration date."

[FrugalIII]

Well, my pension in 5 years will cover 100% of my living expenses so long as I don't acquire any more debt and the cost of living doesn't go up too much. My home is paid for. I have a car payment and a home equity loan which will be paid off by then. No credit card debt. My Roth is allocated according to a target date of retirement, so the allocation should be good. I have no thoughts about cashing in my Roth investments until absolutely necessary. I just hate the thought of investing new money now if the market continues to go down or stays flat for the next who knows how many years. I have no idea how long I will live after retirement, hopefully forever.

[jIM_Ohio]

I would continue to put money into the target date fund. You will break even faster when the market goes up.

If you have 1 share of something valued at $100 and it drops 40% to $60. You would need a 66% gain to break even. The math- $40 gain needed to break even, current value is $60, so $40/$60=66%.

Then you add $100 and buy 1.66 shares. You now have 2.66 shares each priced at $60 or $160 total. Your cost basis is $200, you need a 25% gain to break even. (Break even at $75, not $100). The math- cost basis is $200 (this is the amount you have invested thus far in all transactions), the current value is $160. ($200-$160)/$160=40/160=25%.

So buying more shares at a lower price now lowers the break even point. The more shares you buy now, the lower your basis becomes.

Let's say market stays down for two years and allows you to put $200 into fund at current prices.

Add another $100 and buy another 1.66 shares at $60. Now have 4.32 shares valued at $260. Basis is $300. $300-$260/$260=$40/$260=15% gain needed to break even.

Hopefully you can agree that 15% return is more likely than a 25% return, and 25% is more likely than a 66% return. The issue becomes how big is the $5000 or $6000 Roth deposit relative to the current balance (in my example the deposit equalled the balance which really helped my % returns).

If investments were worth 100k (500 shares at $200 each) and they dropped 40% (shares now worth $120 each); new balance of $60k; the numbers look like this:

Break even is still a 66% return on the 60k balance.

$6000 deposit buys 50 shares ($6000/$120). Cost basis is 106k. Balance is $66k. 106-66/66=61% return to break even.

One more year of similar (year 2):
$6000 deposit buys 50 shares ($6000/$120). Cost basis is 112k. Balance is $72k. 112-72/72=56% return to break even.

One more year of similar (year 3)
$6000 deposit buys 50 shares ($6000/$120). Cost basis is 118k. Balance is $78k. 118-78/78=51% return to break even.

One more year of similar (year 4)
$6000 deposit buys 50 shares ($6000/$120). Cost basis is 124k. Balance is $84k. 124-84/84=48% return to break even.

You don't have the time I do (I have 18 years), but with the 6 years you do have, I would advise to stay with your plan unless your tolerance for risk has changed.


If you think the investment was a bad idea, sell it all and invest in something else- in this case you will never recoup the money you lost- EVER, but this would also probably readjust retirement dates, retirement spending and similar.

[FrugalIII]

Thank you. Based on your calculations, I think my best bet is to stop investing new money. I think my time horizon is too short to take the risk on the market rising enough to break even. Maybe I'm better off putting my new money in something like my 3.5% return savings. Certainly I would not be stupid enough to sell the shares I already own. I'll leave them put until I need them and hope for the best. I'm not a big-time investor. I only had about $100k invested before the crash. I never invested in single stocks and don't plan to start that either.

[jIM_Ohio]

Thank you. Based on your calculations, I think my best bet is to stop investing new money. I think my time horizon is too short to take the risk on the market rising enough to break even. Maybe I'm better off putting my new money in something like my 3.5% return savings. Certainly I would not be stupid enough to sell the shares I already own. I'll leave them put until I need them and hope for the best. I'm not a big-time investor. I only had about $100k invested before the crash. I never invested in single stocks and don't plan to start that either.

One issue not mentioned yet-

you stated your pension covers 100 percent of expenses? So you would not need this money for around 10-17 years maybe (6 working, maybe first 11 of retirement).

Without knowing numbers, tough to guess... but I might suggest you outline your withdraw strategy and asset allocation.

For example if you need/require 60k from all sources to cover expenses and taxes, ans the pension covers 40k, SS covers 16k and you need the Roth to cover 4k, then put 4k into cash within Roth and 2k into the investment side.

Next year do same thing...

You would end up with
1) lower cost to break even
2) cash to cover 6 years withraw (giving investments 6 more years to break even-total of 12 years from now)

There are probably 4-7 different withdraw techniques... and with retirement being 6 years away, I would suggest knowing your withdraw technique within a year or two.