Up Market Not Ideal Time For Retirement
September 30, 2012 by Janese Silvey
People delaying retirement until the economy improves might want to reconsider: A University of Missouri researcher has found that retiring during economic booms can cause problems for one’s long- term financial stability.
Rui Yao, an assistant professor of personal financial planning in the College of Human Environmental Services, knows once people meet their targeted retirement savings goals, they’re tempted to retire in an up market.
The problem, she said, is the economy runs in cycles, meaning the more into an up market one retires, the more chance there is the economy will take a downturn afterward.
“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,” Yao said in a statement. “This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives.”
In the study, Yao examined data from the Health and Retirement Study, a national biannual survey conducted by the University of Michigan. Yao found that the probability retirement-eligible Americans would choose to retire increased as the number of consecutive up-market years increased. And those with a retired spouse were more likely to retire, which also could create financial problems.
“It makes sense that many married couples would want to retire around the same time,” Yao said. “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.”
Yao recommends potential retirees hold off on retiring immediately after reaching their savings goals, especially during an economic boom.
Potential retirees should retire during an economic downturn, she said, as long as they have saved enough to live comfortably. That way, once the market recovers, their savings will increase and create a cushion for future downswings.
Yao’s study was funded by a grant from Prudential Insurance Co. of America and published in the Journal of Personal Finance.
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