As you plan your retirement, make sure to consider the state of the market. While you don’t want to retire into a bear market if possible, retiring at the top of a bull market can pose the same risks, too.
That’s the reminder from recent commentary offered by Morningstar’s Christine Benz.In a recent webcast on the website, Benz noted“starting conditions at the outset of our retirement can give us a little bit of a clue as to how the market might behave, at least over the first 10 years of our retirement.”
A financial advisor can help you plan for retirement in a variety of market environments. Find a fiduciary advisor today.
Sequence Risk Is Important for Retirees to Understand
In the report, Benz alludes to “sequence of returns risk” or sequence risk. While it’s not always discussed, it’s an essential issue for all retirees to understand.
Sequence risk is the chance that you will need to take withdrawals from your portfolio at a time when those assets have lost value.Doing so can depress your overall return and shorten the longevity of your portfolio.
Sequence risk can be particularly impactful for retirees because they often rely on portfolio withdrawals to support their spending needs. As a retiree, if you start selling assets at a loss, you’ll be forced to withdraw a larger portion of your portfolio in order to generate the amount of income you need. That will leave you with fewer assets in the long run, which can permanently reduce your overall savings.
Retiring in a Bull Market Can Sometimes Hurt You
Bear markets are especially challenging for retirees and if you can avoid starting your retirement during a downturn, do so. But as Benz notes, sequence risk can ironically mean that a bull market may not necessarily your friend, either.
One of the signs of a coming downturn is an overly-inflated market. If prices have hit their peak right before you retire, then you can be exposed to a bear market soon after. This, Benz notes, is why investors should be careful about retiring in a long bull run. If prices have hit sustained highs for several years, then there’s a risk that you are looking at the top of a market that’s prime for losses.
While timing the market is all but impossible, being cognizant of the market cycles can help you plan more effectively.
Plan Out Your Lifetime Retirement Withdrawal Rates
The problem is, how do you plan around this? After all, there’s no reliable way to predict exactly when a bull or bear market will swing. What’s more, this issue will remain throughout your retired life. Retirements are long and markets are volatile. You will likely have to navigate many different bull and bear markets over the years.
Benz suggests the best thing to do is to have a plan.Importantly, think in terms of your withdrawal rate, she says. What percent of your portfolio do you want to draw down to hit your income goals? Do you want to pull out 4% of your assets each year, maybe more?
Benz recommends holding assets with strong cash and bond yields, since these are solid, safe forms of income that let youcollect money without having to sell assets. Building a portfolio with the ability to switch between stock returns and bond/cash yields is a great way to hedge against sequence risk. It can allow you to base your withdrawals on the segment of the market that’s stronger at any given time.
Bottom Line
The state of the market can make a big difference on your portfolio when you retire. If you retire at the top of a bull market, there’s a chance your investments will lose value almost as soon as you start tapping them. This is an issue called sequence risk, and it’s important to manage. Christine Benz of Morningstar recommends holding enough assets that produce adequate cash and bond yields so you can avoid selling stocks at inopportune times.
Retirement Planning Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A successful plan for retirement will generate enough income to comfortably support your lifestyle. T. Rowe Price recommends retirees should initially look to replace 75% of their pre-retirement income. You can adjust your income replacement rate based on your income level, marital status and projected spending.
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FAQs
The Success of Your Retirement Plan May Hinge on This Timing Factor. As you plan your retirement, make sure to consider the state of the market. While you don't want to retire into a bear market if possible, retiring at the top of a bull market can pose the same risks, too.
What factors may influence one to take an early retirement? ›
Other factors influencing employee motivation to continue work (or to retire early) are: health status and disability, care tasks and family responsibilities, as well as role conflicts between the family and other roles. Age management in the organization.
What are the 7 crucial mistakes of retirement planning? ›
7 common retirement planning mistakes — and how to avoid them
- Expecting the government to look after you. ...
- Counting on an inheritance. ...
- Not having an estate plan. ...
- Not accounting for healthcare costs. ...
- Forgetting about inflation. ...
- Paying more tax than you need to. ...
- Not being realistic. ...
- Embrace your future.
For many people, it's not just about the money. There are other key factors to consider in addition to finances, including lifestyle, family, health, and community involvement. It's important to assess how prepared you are today and know the steps you may need to take before you're ready to make a decision.
How do you know when is the right time to retire? ›
If you feel like you've completed what you set out to do with your work, that is one indication it may be time to let it go. When you are financially secure enough that you no longer need the income, and feel that you have done all you need to do at your job, retiring might be the right choice.
Who is most likely to retire early? ›
Early retirement is becoming more prevalent amongst wealthier people, while those with average earnings tend to work to retirement age, an IFS report showed. Lifestyle, savings, investing and housing are just some of the factors in play when it comes to early retirement, experts say.
What are the factors that may lead to retirement? ›
health status. financial circ*mstances. attachment to and conditions at work. work-life balance.
What is the 3 rule in retirement? ›
The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule). However, 3% is now considered a better target due to inflation, lower portfolio yields, and longer lifespans.
What is the number one mistake retirees make? ›
Among the biggest mistakes retirees make is not adjusting their expenses to their new budget in retirement. Those who have worked for many years need to realize that dining out, clothing and entertainment expenses should be reduced because they are no longer earning the same amount of money as they were while working.
What is the golden rule of retirement planning? ›
Embrace the 30X thumb rule: Save 30X your annual expenses for retirement. For example, with annual expenses of ₹25,00,000 and a retirement in 20 years, aiming for a ₹7.5 Cr portfolio is recommended.
67-70 – During this age range, your Social Security benefit, if you haven't already taken it, will increase by 8% for each year you delay taking it until you turn 70. So, if your benefit will be, say, $2,500/month if you start at your full retirement age, it would be more than $3,300/month if you can wait.
At what age do you get 100% of your Social Security? ›
The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. The chart on the next page lists the full retirement age by year of birth.
Can I retire at 55 and collect Social Security? ›
You can start receiving your Social Security retirement benefits as early as age 62. However, you are entitled to full benefits when you reach your full retirement age. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.
How to retire at 60 with no money? ›
Get a Part-Time Job or Side Hustle. If you're contemplating retirement with no savings, then you may need to find ways to make more money. Getting a part-time job or starting a side hustle are two ways to earn money in your spare time without being locked into a full-time position.
What month is best to retire? ›
July 31. As a general rule, the end of the month is good for those with pensions, as those often start on the first day of the month after retirement. In this scenario, retiring on the 31st means that you won't have a gap in pay.
What is the best month to retire in 2024? ›
December is often selected as a favored month for retirement due to several reasons: Year-End Financial Planning: Retiring at the end of the year allows you to maximize your retirement contributions and take full advantage of any employer-matched funds for that year.
What are the factors that influence one's adjustment to retirement? ›
Second, the factors that influence retirement adjustment in the data analysis revealed that: 1) pre-retirement self-esteem and friend identity meanings, as well as pension eligibility, increased positive attitudes toward retirement at six months, 12 months, and 24 months post-retirement; 2) retirement planning and ...
What causes early retirement? ›
7 Reasons People Retire Earlier Than Planned
- #1 They could afford to. Thirty-eight percent said they retired early because they could afford to. ...
- #2 Health problem or disability. ...
- #3 Workplace changes. ...
- #4 Workplace incentive. ...
- #5 Desire to do something else. ...
- #6 Caring for a spouse or other family member.
The obtained results confirmed the existence of four factors in the scale of attitudes towards retirement as follows: (i) leisure, (ii) economy, (iii) status, and (iv) health.
What factors contribute to deciding retirement age? ›
Retirement age is influenced by various factors such as economic conditions, health, and personal preferences. Different professions may have different retirement age patterns, with some industries experiencing early or late retirement.
