A few questions near-retirees should ask themselves before they leave the workforce
With stock indexes tumbling, jobs in jeopardy and a looming recession, is it really the time to retire?
Some Americans may have been patiently waiting to retire this spring, or even sometime this year, but the world isn’t the same as it was just a few months ago. The nearly 11-year bull market ended last week, and corporations around the country are closing shops, restaurants and other facilities in an attempt to stop the spreading of the coronavirus, an infectious disease that has infected more than 227,000 people and killed more than 9,000 others world-wide.
“We are living through unprecedented times,” said Jay Spector, a partner and wealth adviser at Barton Spector Wealth Strategies. “Many investors haven’t experienced market situations like this.”
For those who have the opportunity to decide if now’s the right time to retire, they should check that their finances are in order — and that they have a plan in place for the foreseeable future, advisers said.
Of course, as is the case with nearly every financial planning decision, whether one can retire now depends on a few factors, including how much that person or household has saved for their futures, how their portfolios are invested and what sort of income they can expect within the next few months and years. “Can people retire? Absolutely. Should people retire? That’s a different story,” said Chris Hardy, founder of Paramount Investment Advisors. “This is where having realistic expectations about returns (and volatility) are crucial and that cash flow is king.”
But if retirement is on the horizon, here are a few factors to consider:
Financial advisers typically suggest reducing exposure to stocks as an investor nears their retirement date, and that’s no different in this scenario. Savers who are still heavily invested in stocks may want to delay their retirement, said Michael McKevitt, director of financial planning at Guillaume & Freckman. “The reason is that they don’t know how quickly markets will recover and the risk is that they don’t recover for quite a long time.” If that happens, people may need or want to go back to work — and it’s hard to re-enter the workforce for numerous reasons.
People still planning to exit from the workforce may want to buy safer assets, such as U.S. Treasury bills, notes or bonds, said William Parrott, president and chief executive officer of Parrott Wealth Management. He recommends his clients buy three years’ worth of expenses in those investments, so if someone’s annual expenses are $100,000, he’d purchase $300,000 in bonds. This way, “they don’t have to worry about the stock market volatility,” he said.
There are various strategies for asset allocation, and an investor may want to consult with a financial professional before retiring.
Someone with guaranteed income, such as from a pension or annuity, is better positioned than someone who plans to spend down their 401(k) savings, said David McPherson, founder of Four Ponds Financial Planning. “As a general rule, I would try delaying retirement decisions until we get past the current public health crisis and have a better idea of how we will emerge from it.”
Think of all of the possible streams of income and how they’d be tapped in retirement. Potential sources include Social Security, pensions, 401(k) or individual retirement account assets, real estate and any other income family members may be bringing in and sharing. Then consider how much the household spends, and on what, including mortgage payments, insurance, utilities, health care and general living expenses, said Charles Failla, principal of Sovereign Financial Group. “Once someone can quantify their resources and goals, then they can better begin to answer the question ‘can I retire?’” he said. Really, the question is, “do I have enough resources to sustain my spending needs and goals without earning income?” he added.
Investors should also consider if and how much debt they have when entering retirement. “Not having any debt payments allows more control over monthly cash flow and can weather a storm like we are currently in,” Hardy said.
Financial plans are crucial during times like these, advisers said. “If clients have been doing the proper planning to achieve retirement, then they should still consider their retirement plans,” Spector said. “If clients, however, can’t control how they behave during difficult times like this and stick with the plan that was developed, they will not realize the rewards of their plan — either with income from their portfolio, growth of their portfolio or both.”
Overall stress at this time
People who have a proper asset allocation could still retire now, but they may also want to wait if they’re anxious about market activity. “Working six months to a year longer would eliminate that stress,” McKevitt said. Along with the amount of money saved and future retirement plans, people may want to reassess their risk tolerance during market volatility.
There are a few questions near-retirees should ask themselves before they leave the workforce, said Michael Hennessy, founder of Harbor Crest Wealth Advisors.
Ask questions, such as: How will you support your living expenses? What will you do about health care, and are you eligible for Medicare or factored in out-of-pocket health expenses until you can enroll in Medicare? Will you need to start drawing down your investment portfolios to make up your retirement income? Do you need to claim Social Security benefits early, which can limit how much you receive in benefits overall? And what will you do in retirement if you chose to exit from the workforce now? Why do you want to retire now — is it just because of market volatility?
“There’s typically only one shot to retire correctly,” Hennessy said. “Don’t jump into the decision rashly.”
As always, we encourage you to consult with an experienced financial advisor to address specific concerns about your retirement plan or investment portfolio.