Should you retire now or wait?
You've spent decades building the "perfect" retirement plan and you're all set. However, the day you submit your letter of resignation, the market crashes. What now?
Many experienced this situation in the past year and did not know what to do. Should they still retire? What are they risking? Will their savings still be enough? Today we'll look at the pros and cons of retiring "on time" even if the market is down.
First, review your retirement goals
You may be tempted to act purely out of reaction after seeing the value of your retirement account, but don't rush anything. Before making decisions about your investment portfolio or retirement, go back to the basics of your plan and remember why it's designed that way.
- What goals have you set yourself?
- What are you most excited about?
Ask yourself if your feelings or priorities have changed. In other words, if it weren't for the falling market, would you even be in doubt? If you've kept your plan updated every year, the answer is probably "no." Then it comes down to the timeline. For many people, the most important thing about retiring is doing it the way they want to and not necessarily the timeline it takes to get there. If the markets worry you or put pressure on your goals, you may just have to wait a little longer. This may be all you need to give yourself a better chance of living the life you've been planning and saving for for years.
What exactly is a falling market?
The (financial) press talks about falling markets all the time, but what does that actually mean? In general, there are three "stages" of a falling market and it's important to understand what each of them means.
- Market declines are sustained declines that usually last for at least a year before turning around. This is also referred to as a 'bear' market.
- Market corrections occur when the market is down at least 10% from its most recent peak. How long it lasts isn't much of a factor and while they can last for a while, they are often very short-lived as well.
- Market crashes are not defined by a specific percentage drop or duration, but when the market drops quickly by a significant percentage.
Understanding the characteristics of the market can give you a better idea of how your portfolio and your goals will be affected and what your best options are for coping.
The benefits of retiring, even when the market isn't right
While it's certainly something you shouldn't ignore, a falling market doesn't always mean you need to change your planning horizon. For some, it may make sense to stick to their original retirement timeline.
Some factors that may contribute to your choice to stay the course include:
- Secure ways of steady income that will meet your needs and are enough to make you comfortable. These are things like your state pension, an annuity, interest from bonds, or a significant cash reserve. Since these do not rely on market performance to fund your withdrawals, they provide protection against market volatility.
- If you are comfortable adjusting your withdrawal rate. Even if a significant portion of your investments are exposed to the falling market, you can protect yourself by reducing your withdrawals if your balance drops too much.
- If you have additional tax savings options. Taxes are very important in retirement and your tax bracket can be drastically affected by withdrawals from your retirement account. The more tax-friendly you are, the less you have to withdraw. By proactively responding to tax-saving opportunities, you can reduce the pressure on your investments.
Important cons to consider before retiring in a bear market
There are also reasons why you want to avoid retiring when the market is low. Primary risks are:
- The effect on the life of the portfolio. The more you take out of your portfolio, the faster it gets depleted. This effect is amplified if you retire during a bear market. If you plan to live well into your 90s, be careful about how much you take in. Waiting is your best defence, but you may also want to rethink your investment portfolio in light of starting withdrawals.
- Lack of income stability. Losing your income when the market falls further amplifies the downside. Instead, your wages can cover your living expenses and you can absorb some of your losses by continuing to contribute to your retirement accounts. Remember that the best market days tend to follow some of the worst. When you contribute during a falling market, you buy cheaper stocks and then create momentum for the market to recover.
- Detract from your lifestyle. Remember the biggest reason you plan to retire and remember what you want. If you retire in a declining market, you may need to make the necessary lifestyle trade-offs until the market recovers. Since we don't know how long that will take, it might be better to hang on a little longer rather than risk ruining the best time of your life - your retirement.
With all these options and considerations, how do you know what move, if any, to make? You need a method to evaluate your options and Expat Investing can help you with that with an analysis. This analysis allows you to estimate, as an easy-to-understand percentage, the probability that a given scenario will be successful based on a wide range of potential investment outcomes. We can perform this analysis for you and help you make the most informed decision based on what the results show.