Invest Retirement

Everything You Need To Know If You’re Retiring Into A Downturn

Bev O'Shea  |  September 28, 2022

Here’s what to do when you want to retire but your carefully crafted plan runs into inflation and your account balances have been affected.

Inflation is higher, the stock market is lower. And this is when you planned to retire. Does this change anything? Should it?

The answer to the first question is, statistically, it does change things. According to Vanguard, retiring into a bear market has, historically, made people 31% more likely to outlive their money. (Not surprisingly, it affects income streams and bequests.)

There’s not a one-size-fits-all answer to whether this means you should rethink retirement. Advisers agree on what you should not do: pull all your money out of the markets, either to wait until you think it’s in a solid bull market or because you have become too afraid.

Understand “sequence of returns” risk

“Sequence of returns” risk is the bad luck almost-retirees are experiencing right now. Basically, it means that market losses just before or shortly after you retire can have an outsize effect on your investment income in retirement, says Rachel Elson, a certified financial planner and wealth adviser for Perigon Wealth in San Francisco.

It’s the reason for the stomach-dropping feeling when you look to make sure the retirement date that looked good in January still looks good now that your account balances have dropped.

If you’ve saved over many years, you’ve seen your balance drop before — but it was money for someday, not next month. 

Here’s how sequence of returns can erode retirement resources. Let’s say you have $100,000 in a retirement account, and just before you retire, the market drops 50%. Now you have $50,000. Then the market goes back up 50%. But that doesn’t restore your $100,000; you now have $75,000. And that’s if you didn’t withdraw any to pay for retirement.

So, ideally, you don’t retire just before or after a big drop. 

That doesn’t mean you can’t retire now, though. Or even that you shouldn’t. If you have saved enough, or more than enough, you may still be able to. 

Here are some things you can do to make the transition less worrisome.

Make sure you’re really ready

Use a checklist to be sure you’ve covered all bases, advises Nasha Knowles, chartered retirement planning counselor and certified financial planner at Equitable Advisors in Atlanta. “Budget, health care, estate plans and living wills, money for the next 12 to 24 months and safe investments.”

If you haven’t yet completed these, you’re probably not ready to retire, or at least not ready to retire fully. 

Knowles recommends talking with a financial professional who can do simulations to predict how likely it is that the money you have saved will be enough to sustain the life you’re hoping for in retirement. Better to find out now that you need to work a couple of more years and reallocate investments than to find out too late that you should have.

And make sure that what was true a few months ago is still true, advises Elson, particularly if you are planning to let go of a regular paycheck: “Everyone’s situation has changed this year.”

And we’d be remiss in not reminding you that if you can wait until you are 70 to start drawing Social Security retirement benefits, your checks will be larger. Working longer can be especially beneficial to women who stepped away from the workforce to care for children or parents and have some years with no earnings.

Redefine retirement

Retirement doesn’t have to be all or nothing. 

Jill Fopiano, president and CEO of O’Brien Wealth Partners, a boutique wealth management firm in Boston, says that if the current environment makes you nervous, consider something between full retirement and a full-time job.

Your company may offer a runway to retirement (where you work fewer hours and share what you know with younger workers). Or you could create your own or become a consultant. Or find some other job that allows you to delay tapping your savings or to take less out of savings while the market recovers. 

Retirement could last for 30 years, and you’re probably not going to want to play golf every single day of it, Fopiano says. What DO you want to do?

“Retirement” can mean a return to pursuing a childhood dream. Or working a part-time job or consulting. Or starting a second career. It does not have to mean you no longer earn an income. 

Delay the celebratory vacation

The start of retirement has typically been when retirees treat themselves — a time to travel, have fun and just generally reap the rewards of years of labor. Do you still take it?

“If you’re retiring into recession, gee, you might want to think about some of those discretionary expenses and maybe delay that round-the-world trip for a year or two until you feel a little bit more comfortable,” Fopiano says, “because ‘Are you really going to enjoy it if you take it now?’” (If yes, and you are confident you can afford it, go ahead.)

Tighten your budget — for now

If inflation has laid waste to the budget you made last year, confident you could afford to maintain your lifestyle or upgrade a bit, consider looking for places you can tighten up. In addition, make sure you have a firm handle on what medical costs are likely to be. 

Especially if you’ve  had company-paid health insurance up to now, finding out what Medicare will cost — and what it excludes — can be eye-opening. Now’s a good time to double-check to be sure your budget is realistic. 

If it’s a parent who is retiring

Ask lots of questions, Fopiano says — even the uncomfortable ones. You can ask about how they plan to spend their time, what their hopes and dreams are and more. 

Ask if they plan to relocate. If a retirement community or assisted living is a consideration, start finding out how long waiting lists are. Some knowledge about what your parents want to do and financial resources can give you both an idea of what to expect.

It can be awkward to broach the subject of wills, HIPAA medical privacy authorizations, financial power of attorney and healthcare directives (Equitable has a guide that can help). The easiest way may begin, “I was just making my will and . . . .” Ask for their advice and experience, and find out what you need to know about their documents as you update yours.

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