Retiring in a recession?  What future retirees should know about retirement during a market downturn

Retiring in a recession? What future retirees should know about retirement during a market downturn

If you’ve been watching your retirement portfolio for the past few months, you’ve probably noticed that the value of your nest egg has dropped dramatically. From the start of 2022 to November 2, the value of the S&P 500 fell more than 21%, the Dow Jones fell more than 12%, and the Nasdaq nearly 33%.

And the stock market isn’t the only aspect of the economy hurting future retirees. In recent months, inflation has remained at record levels. The Fed has responded by raising interest rates and many are predicting a global recession as businesses and consumers give up buying and borrowing in response.

As people look to their future retirement, it can seem less than optimistic. If you’ve spent the last decades of your life saving money for your golden years, the recent market downturn doesn’t mean your efforts were wasted, however.

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Saving for Retirement 101

Most people have three main sources of retirement income: personal retirement accounts (401(k) and IRA), pensions, and Social Security.

However, most people will end up relying primarily on income from their retirement accounts. Most personal finance experts recommend saving in both a 401(k) and an IRA, whether it’s a Traditional IRA or Roth IRA. Select ranked Charles Schwab, Fidelity Investments, Vanguard and Betterment among companies with some of the best individual retirement accounts.

Most companies no longer offer employee pensions, and Social Security usually replaces only a small portion of people’s pre-retirement income. According to the Center on Budget and Policy Priorities, a person with average lifetime incomes would only earn 37% of their pre-retirement income from Social Security benefits. This means that the responsibility to save for retirement rests entirely with the individual.

As a general rule, personal finance experts recommend that retirees save 25 times their annual living expenses. In other words, someone with annual living expenses of $40,000 should aim to save $1 million for retirement. At retirement, the individual would withdraw no more than 4% of their retirement portfolio annually, taking inflation into account.

However, this rule has fallen into disuse as people’s lifespans lengthen and the cost of living rises. Because the 4% retirement rule is based on assumptions about people’s lifespans, portfolio allocations, and historical market returns, it is not a one-size-fits-all rule.

“That’s why planning is so helpful, so you don’t have to use rules of thumb,” says Douglas Boneparth, president of Bone Fide Wealth.

In fact, Richard Sias, professor of finance at the University of Arizona, recommends a much lower withdrawal rate. He found that people would actually need to withdraw a meager 2.26% from their portfolio (assuming a 60/40 stock and bond split) to have a 95% chance of success. In other words, if you withdrew 2.26% of your retirement nest egg annually, you would have a 1 in 20 chance of running out of money before the end of your retirement.

And if you’re worried about how the recent market downturn will affect your retirement rate, researchers have looked to history to see how seniors fare when they retire in a bear market. T. Rowe Price examined the performance of people’s retirement portfolio after retirement in bear markets in 1973, 2000, and 2008, finding that portfolio values ​​eventually rebounded or exceeded their original value about 10 years later.

The researchers note the importance of flexibility in response to market downturns. Retirees should use a withdrawal rate that changes based on factors such as inflation, market fluctuations, and changes in individual spending needs to ensure long-term success.

Is it time to change your portfolio allocation?

At the end of the line

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

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