Most clients will rely on investments to fund a significant portion of their retirement income needs. Managing all aspects of their investments as they approach and enter retirement is a key part of the work that advisors do for these clients.
This is a major contributor to their quality of life in retirement.
Looking back to the financial crisis from mid-2007 through early 2009, we saw a number of retirees and near-retirees suffer portfolio losses that hindered their ability to retire. Market timing as clients head into retirement and through their early retirement years is a very valid concern.
When to Retire?
This has always been a key question for clients approaching retirement, though it is less clear cut these days as many people choose to phase into retirement rather than retiring "cold turkey" as was prevalent in past generations.
Whether a full cessation of work or something more gradual, planning for the timing of clients' retirement is key in many respects. This includes when to claim Social Security or pension benefits and a host of other decisions.
Managing their investment portfolio into retirement is critical. How should their assets be allocated? What happens if the market takes a major hit just as they are looking to retire?
Is Now a Good Time to Retire?
Obviously, the answer to this question depends on factors that are specific to a client's overall situation. But in terms of the market environment, this would likely be considered a good time to retire.
Major market indexes like the S&P 500 and the Dow Jones Industrial Average are at or near all-time highs. Clients who need to liquidate equity holdings to build a cash reserve to fund retirement income distributions over the next couple of years will likely be able to sell many holdings at or near historically high levels.
This could be a market high point depending on what happens over the next year or so. This isn't a prediction that the markets are going to fall, but we are in an election year. Even though markets generally rise in an election year, there is a lot going on in 2024. In addition to the election, we have:
- The direction of interest rates
- Inflation worries
- World events such as the wars in the Middle East and Ukraine
Sequence of Returns Risk
Sequence of returns risk refers to the risk that a significant negative market return will occur late in clients' working years or early in their retirement years. During the financial crisis, there were many stories about retirees or those nearing retirement whose portfolios were decimated just as investors needed to take distributions from their investment accounts.
This is the ultimate "double whammy" for their retirement savings. These folks sold assets that had dropped in value, so they needed to sell more shares than they otherwise might have. This left a smaller number of investment shares to benefit from the recovery that ultimately followed, putting many of these retirees in tough financial shape.
There were cases where retirees were forced to delay retirement due to portfolio losses or to go back to work in order to make ends meet.
One key issue is the need to liquidate assets to raise cash in the face of a steep market decline. This can be devastating to a client's retirement portfolio, in some cases severely limiting the longevity of retirement assets.
Those retiring into a strong market environment will have the advantage of growth in the remaining equity portion of their portfolio, even as they liquidate some assets to fund retirement income distributions over their first few years of retirement.
