Recovering from a Nest Egg Raid

April 9th, 2008  |  Published in Retirement  |  Comments Off on Recovering from a Nest Egg Raid

When you retire, a nest egg is that pot of money that you rely on to generate income year after year. You might have it in some large cap dividend stocks or a batch of CDs or some other income producing asset, that’s a good idea. However, there may come a time when you need to tap into that nest egg to deal with emergencies. When that time comes, you may be tempted to over-correct by plowing some funds into riskier investments in an attempt to recover and that’s a bad idea.

Let’s take an easy example of $100,000 in a CD earning 4% a year. Each year you are depending on that asset to generate a tidy sum of $4,000 a year. However, this year you had a medical emergency and had to raid the fund for $5,000. Next year, you only earn 4% on $95,000 – or only $3,800, a difference of $200. If you have another emergency, that fund falls even more. You can see how these nest egg raids can have a deleterious long term effect.

This is where you may be tempted to correct for this emergency by putting a lot of money into the stock market to make up for it. Don’t! The answer is that you should cut your expenses so you can try to slowly recover the $5,000 you lost. Don’t try to make it back on the stock market because one negative downturn and you may never have enough time to recover.

Cut expenses rather than go for broke.