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The Great Resignation, and a Great Retirement

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What You Need to Know

  • About 750,000 Americans have more than $1 million in their retirement accounts.
  • Inflation is up.
  • A plan can help clients make resources last.

The American workforce has experienced an influx in early retirements—so many in fact, that the surge has contributed to what is now being referred to as “The Great Resignation.” A large portion of participants in this mass exodus are individuals born between the years of 1946 and 1964, or more commonly referred to as the baby boomer generation. These 57- to 75-year-olds are retiring by the millions for a number of reasons, among which include:

  1. The risk of contracting coronavirus.
  2. A lack of attractive employment, particularly in the service industry.
  3. A strong stock market that has made it financially possible for early retirement.
  4. The rise in home values has increased net worth and borrowing power.

There are currently over 750,000 Americans with retirement accounts amounting to at least $1 million, which when compared to 2020, is a 75% increase. In 2021, the average 401(k) balance has risen 24%, and similarly, the average IRA balance rose by 21%, according to Fidelity Investments.

With the American economy growing increasingly reliant on workers over the age of 55, these scenarios may leave the remaining workforce asking, “Should I too be considering retirement?”

There are many factors that should be considered before joining this retirement wave.

The Challenges

Inflation is currently running at its highest rate in nearly 40 years, reaching 6.8% in November 2021. In short, retirement investments are losing purchasing power.

Another economic likelihood is that equity markets may be unable to continue the three-year streak of double-digit growth. The Federal Reserve has announced bond purchase tapering followed by up to three interest rate hikes this year. Equities generally react negatively to interest rate hikes as borrowing costs increase.

Social Security is still another issue to think about. Establishing a Social Security claiming strategy is an additional consideration that should be made when debating retirement. While the average Social Security benefit amounts to $1,500 a month, there are strategies, depending on other resources, that can enhance the amount received. Social Security currently replaces less than half of the average worker’s earnings. The Center on Budget and Policy Priorities reports that for about 1 in 4 seniors, Social Security payments provide at least 90% of their total income.

The continued low-interest-rate environment has also reduced income from certificates of deposit, money market fund, and bonds. The Federal Reserve System board found that these realities, paired with the continuous economic distortions created by coronavirus, have left 44% of current retirees questioning if their reserves are inadequate.

However, not all is negative.

The Bright Side

There are several positives to consider when contemplating retirement from the current workforce. The U.S. economy remains on solid footing with the Federal Reserve Board predicting 2022 GDP will grow from 3.1 to 4.9%. In addition, the 2022 Social Security benefits cost-of-living adjustment was 5.9%, which is the highest annual increase since 1982.

In terms of managing retirement savings, other than during periods of inflation rates exceeding 6%, stocks and bonds have generally provided solid returns. Investments should be focused on companies with pricing power and proven dividend growth. Dividend payments are generally less volatile than earnings, particularly from companies with strong pricing power. These companies pass along price increases to their customers. Although rising inflation or interest rates can hurt stock prices temporarily, the stability of dividends can lead to higher total returns.

As we continue to endure above average inflation rates, Treasury Inflation-Protection Securities, or TIPS, should be considered in the fixed income portion of your diversified portfolio. The principal of a TIPS instrument increases with inflation and decreases with deflation by paying interest twice a year at a fixed rate. The rate is applied to the adjusted principal, so both the principal and interest payments rise with inflation and fall with deflation. TIPS are issued in terms of five, 10 and 30 years and are normally state and local (not federal) tax exempt.

The Plan

As more and more individuals begin to plan for their withdrawal from the workforce, it’s necessary to acknowledge all aspects, both positive and negative, of retiring within the existing economic climate. Nevertheless, at the end of the day, the number one concern for most contemplating retirement is, “can I preserve my current lifestyle?” Or, put simply, “will I run out of money before I die?” The solution is to build confidence in a retirement decision, and that begins with a comprehensive financial plan. A solid plan will act as a roadmap through the thicket of inflation, low interest rates, stock market volatility, and other financial challenges.

Financial professionals should be providing their clients answers to pertinent questions, such as:

  1. What is a safe retirement account withdrawal rate?
  2. Should I increase or decrease my investment risk?
  3. When should I begin taking my pension or Social Security benefit?
  4. What survivor benefit should I choose?
  5. How would downsizing my primary residence affect my long-term finances?
  6. Should I make Roth IRA conversions?
  7. How do I plan for rising healthcare costs?

The Great Resignation has generated an unprecedented number of discussions about the possibility of retirement, and for a large portion of the workforce, these conversations are occurring much earlier than originally planned. With the continued debate surrounding retirement account withdrawal rates, questions about the current state of the economy, and uncertainty surrounding the ongoing financial effects of Coronavirus, the ability to rely on the guidance of a trusted financial advisor is more important than ever.


Fountain pen (Image: iStock)Jesse Young, CFP, CRPC, is director of financial planning at Alera Group Wealth Services, a firm that works with individuals, families, and businesses.