Is Now a Bad Time to Retire?
Research shows how those who retire during bear markets can still preserve their nest eggs.
Research shows how those who retire during bear markets can still preserve their nest eggs.
Retiring during a market downturn and soaring inflation can feel like sailing into the wind instead of the sunset.
The market’s performance in the first few years of retirement can have a big impact on how long a nest egg lasts, partly because losses take a bigger bite out of a portfolio when it is typically at its largest, advisers and economists say.
Of course, it isn’t always possible to time your retirement to coincide with a bull market.
But those nearing retirement right now can take some comfort in research that shows that even people who retired in the worst time to do so since 1926 would have made their money last 30 years by sticking to certain rules. As the stories of the four retirees The Wall Street Journal profiled this week show, even those who retired in 2008 have done fine provided they managed their money well.
Negative returns at the start of retirement, when a portfolio is usually largest, create a problem because the combination of market losses and withdrawals can leave a portfolio too depleted to last decades.
“The five years after retirement are a pivotal period for determining a sustainable lifestyle in retirement,” said Wade Pfau, a professor at the American College of Financial Services in King of Prussia, Pa., and author of “Retirement Planning Guidebook.”
Consider a 62-year-old who retired on Jan. 1 with $1 million and is following the 4% rule to determine how much to spend in retirement. (Such an approach, which has been questioned recently, calls for spending 4% of a balance in the first year of retirement and adjusting that amount in subsequent years to account for inflation.)
After taking the first annual withdrawal of 4%, or $40,000, the investor would have $960,000 left. With a 15% loss in the first year, the balance would fall to $816,000. Two more years of similar withdrawals and 15% losses would leave about $527,000 to last potentially for decades.
By contrast, a 62-year-old who retires with $1 million and experiences 15% annual gains would have about $1.36 million after three years of $40,000 withdrawals.
Despite the market’s importance in early retirement, history shows that the portfolios of people who retire in down markets can recover.
Thanks to the long bull market and low inflation that followed the financial crisis of 2008, someone with 50% in stocks who retired with $1 million on Jan. 1, 2007, and spent $40,000, adjusted annually for inflation, would have had about $874,000 left after two years, but would have about $1.63 million today.
“As long as you didn’t panic and sell your stocks in 2008 you’d be doing fine today,” said Mr. Pfau, who crunched the numbers for a portfolio with 50% in U.S. large-cap stocks and 50% in intermediate-term U.S. government bonds.
Another lesson for retirees contending with losses is to cut spending if possible, since “if you’re overspending from a portfolio that is simultaneously dwindling, that just leaves less in place to repair itself when the markets eventually recover,” said Christine Benz, director of personal finance at Morningstar Inc.
The worst 30-year period in which to retire began in the late 1960s. Those who retired then were clobbered with back-to-back bear markets that started around 1969 and 1973, plus years of high inflation. These factors caused many to drain their nest eggs faster than they would have otherwise, although many in that era were able to fall back to some extent on traditional pension benefits.
If markets slide and inflation remains high for the next couple of years, as some economists have predicted, Mr. Pfau said it could create “the perfect storm,” leaving investors with a choice between withdrawing more from a shrinking portfolio or cutting spending to try to protect their nest eggs even as prices rise.
Here are steps retirees can take to improve their odds of making their money last:
The 4% rule would have protected retirees from running out of money even in the worst 30 year period since 1926 in which to retire, which turned out to be from 1966 to 1995, according to Mr. Pfau.
For current retirees, Mr. Pfau recommends forgoing inflation adjustments following any year in which your portfolio incurs losses.
“A very small change in spending can have a dramatic effect,” said Mr. Pfau.
For example, someone who retired in 1966 and stuck to the 4% rule would have run out of money after 30 years. But by spending 3.8% to start instead, the investor would have preserved most of his or her original nest egg by year 30, he said.
People entering retirement often have 40% to 60% or more in stocks to help their nest eggs grow.
A 2014 study by researchers including Mr. Pfau finds that those who start retirement by reducing their stockholdings to 20% to 30% of their portfolio and then gradually push it back up to 50% to 70% in stocks have the highest probability of making their money last 30 years using the 4% spending rule.
Those who take a different approach, tapering stockholdings from 60% to 30%, are likely to run out of money after 28 years in the worst-case scenarios, according to the research.
That said, the conventional approach of starting retirement with more in stocks and reducing that exposure over time comes out ahead if stocks fare well in the early years of retirement. But reducing stock market exposure up front provides better downside protection in those early years, when retirees are most vulnerable to financial losses, says Mr. Pfau.
When markets decline, rather than sell stocks at a loss, retirees with whole life insurance may be able to withdraw from their policies to meet living expenses. Another option is to tap home equity with a reverse mortgage line-of-credit. There can be downsides, including high fees on reverse mortgages, so weigh the pros and cons carefully, Mr. Pfau said.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 30, 2022.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
There’s more to building substantial savings than putting away what you can after paying your bills
Whether you’re starting your wealth creation journey in your 20s, 30s, 40s, 50s or beyond, the core principles remain consistent. Create more income, manage your savings, and invest intelligently.
We look at the best wealth creation strategies depending on which decade you’re in right now.
In your 20s
The key to wealth creation is to start early. So if you’re reading this and you’re in your 20s, you’re well ahead of the game.
Accept that the greatest investment you can make is in yourself and your ability to earn an income.
“If you want to build wealth in Australia, you need to have a plan to be earning more than $100,000 per annum either now or within the next five years,” financial planner Chris Carlin says. “Most finance experts focus on ways to reduce your expenses, which is important, but for sustainable long-term wealth creation, we believe that you should be focusing on ways to increase your income rather than just focus on reducing your expenses.
For more stories like this, order your copy of the latest issue of Kanebridge Quarterly magazine here.
“If you need to change careers, study, start a business or ask for a pay rise, do whatever it takes to get your income above that level while you’ve got time on your side. Next step is to buy a house, because the sooner you get your foot in the door of the property market, the easier it will be for you to build wealth over the long term.”
Bear in mind that your first home doesn’t need to be your forever home. Think of it as your foot in the door to build wealth.
“If you’re accessing a first home buyers grant, you only need to live in it for 12 months and then you can consider converting it into an investment property or selling it,” Carlin says.
In your 30s
This is the time in life to establish a regular investment strategy. Consider long-term investments that you can lock up for five to 10 years. You can take on more risk at this time of your life, which can generate higher returns.
Set your priorities for life, and don’t take on more debt than you can afford to pay back.
Also, keep track of expenses and income with budget planners — a great habit to get into now.
There are many other things you should be considering too, such as topping up your super above the Super Guarantee and reviewing your personal insurance and investments.
In your 40s
This can be an expensive time of life, particularly if you’re supporting a family. But you’re probably in a more stable financial position by now, giving you a good springboard into investments such as a diversified portfolio of shares.
Investing in property is the best option at this age, whether it’s the family home or an additional property that can be utilised for an Airbnb. Also, make sure you rein in your debt. A bank loan for a mortgage is one thing, but debt on credit cards is hard to justify by this stage of your life.
Invest in your retirement by topping up your superannuation. Even an additional $50 a month will benefit from the wonders of compound interest.
Generally speaking, shares outperform other investments over the longer term. And if you invest in companies that pay dividends, you’ll benefit from being paid part of the company’s profits, generally twice a year. While dividends are less common in a downturn like we’re having now, they are likely to increase once company profits recover.
In your 50s (and beyond)
If you’re in your 50s or older, traditional financial planning tends to encourage less aggressive asset classes as people near retirement.
If you’re in a low asset position due to divorce and having to start again or you’ve missed the real estate boom and are still renting, the main focus should be on controlling spending and pumping money into super and savings and then investing aggressively, advises financial adviser and money coach Max Phelps.
“Property investing is either an option through super, or outside of super if the deposit can be raised,” he says. “Outside of super, properties with scope to improve, extend or subdivide will help build capital faster than normal market growth, to help catch up.”
Share investing could also be an option, with particular focus on high growth funds, such as international securities.
“Controlling spending at a level just above the aged pension should be a key focus, otherwise it’ll be a big step down when you finally stop work. Use a good budgeting and planning app,” Phelps says.
However, if you own your own home, and have a standard super balance, focus on the home and perhaps look at downsizing opportunities in the future.
“Maximising super contributions is likely to be beneficial to get the tax savings, potentially using a transition to retirement strategy,” he says. “For those looking for a sea or tree change, we would always recommend keeping the family home until a year or two after moving to a new area to make sure it really suits.
“For those wanting to stay in the same home forever, releasing equity to buy a couple of high yielding investment properties could be a good option, with the time to pay down the mortgages and keep them for additional income for retirement,” Phelps says.
If your own home is paid off and you have a high super balance and a strong asset position, the focus will likely be on asset protection and less risky asset allocation for investments, he says.
Whatever age you are, consider getting help now. The right financial advice early can set you on the right track.
Adidas might sell its struggling Reebok brand, potentially taking advantage of the strength of athletic goods, which have been a bright spot in apparel during the Covid-19 crisis. On Monday, Adidas (ticker: ADDYY) said it was reviewing Reebok’s future, which could include a sale. The news comes ahead of the company’s five-year blueprint, which it is …
Continue reading “Why Now Might Be A Good Time For Adidas To Sell Its Reebok Brand”