U. MISSOURI (US) — Many Americans choose to retire when economic markets are peaking—an action that can, ironically, cause major problems for their long-term financial stability.
“Potential retirees often will first meet their targeted retirement savings goals during an up market and will be tempted to retire at that point,” says Rui Yao, an assistant professor of personal financial planning at the University of Missouri.
“The problem with this strategy is that the economy runs in cycles, meaning that after a peak, the market will take a downturn.
“People who have retired shortly before an economic downturn run a serious risk of losing a significant portion of their retirement savings, which will shorten the longevity of their retirement income. This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives.”
It would be more advantageous for potential retirees to hold off on retiring immediately upon reaching their target savings goals, particularly during an economic boom and consider retiring during an economic downturn, as long as they have saved enough to be comfortable. That way, once the markets recover, retirees’ savings will increase above their initial target goals, which will create an adequate financial cushion for future economic downturns.
The study reviewed the financial and retirement statuses of more than 4,000 households with retirement-aged Americans from 1992 to 2008. The probability that retirement-eligible Americans chose to retire increased as the number of consecutive up market years increased. Every one percentage increase in market returns increased the probability of retirement by more than two percent.
Yao also found that working Americans with a retired spouse were more likely to retire than all other household types, including those with a working spouse and those without a spouse—a trend that could further financial problems.
“It makes sense that many married couples would want to retire around the same time,” Yao says. “However, if both spouses decide to retire close to the end of an up market, the household would have little to no cushion should their retirement portfolios be affected by an economic downturn.”
Ultimately, Yao believes these findings show the need for retirement planners, employers, and financial educators and practitioners to help pre-retirees better understand the challenges they face in order to reduce the likelihood of financial problems after retirement.
Source: University of Missouri