Should You Retire When the Stock Market Is Down?
Should You Retire When the Stock Market Is Down?
As we’ve written about in the past, downturns in the market are often followed by feelings of uncertainty - fear of the the future. These emotions often manifest as actions - decisions we make that impact our financial lives.
We often hear from folks (prospecting & existing clients alike) the million-dollar question... “Should I retire now, or wait until the market comes back up?”
For our younger clients who aren’t yet looking to retire, it may be the same question but for a different life transition... “Should I start my own business/change jobs now, or wait until the economy is in better shape?”
As many of you know, this question is founded on some old fashioned ideas that were shoved into our minds by the “financial media”. Ideas that say...
You can’t retire during a recession
Your spending needs to decrease when your portfolio value decreases
You should time your retirement around movements in the market
While there is merit to these ideas (more on that later*), we want to debunk some of these money myths and provide clarity for you as you navigate life’s big transitions.
Timing the Market vs. Time Horizons
One thing is certain, we don’t have the ability to accurately predict which way the market will move on any given day. So, if you’re waiting for a sunny spring day where the markets send you a note saying they “guarantee to go up for the rest of your retired life”, keep dreaming...
Because you cannot time market movements, you must manage your money to time horizons.
Many of you know this as our “Three Buckets” approach. Each bucket represents a time horizon for a financial need or goal:
Short-Term — 0-2 years
Mid-Term — 3-6 years
Long-Term — 7+ years
These time horizons are determined by decades of academic and market research, and are designed to allow the market to work in your favor by you staying disciplined within each time horizon.
Here’s why a market downturn (and even a recession) should not be the determining factor as to whether or not you should retire...
If you have properly allocated money into each time horizon bucket, then you needn’t worry about short-term market movements.
Okay, but WHY?
Three Big Reasons:
When you’ve planned appropriately, you should have up to a two-year runway of cash on hand.
So if you retire now, while the market is down, no big deal! You’ll pull from your cash reserves to meet your needs over the next 18-24 months.
As time goes on, and the market eventually recovers, we make allocation changes within your portfolio.
Need more cash to replenish your short-term bucket? We’ll look to sell stock funds or bond funds within your portfolio to create the necessary cash. Whether or not you decide to sell stocks or bonds at that time will depend on multiple factors (total portfolio value, current performance, your unique tax situation).
We manage your portfolio in conjunction with your Financial Life Plan.
So you can rest assured that your financial time horizons are being reviewed, and your investment holdings are being managed pursuant to the unique timing of your life.
At the end of the day, that’s what it’s all about, right? Getting your financial resources to align with your unique goals and values... not the other way around.
*Special Note: As described above, a stock market downturn should not directly effective your daily spending decisions. However, there is merit to this approach from one simple standpoint... if you decrease spending due to a market downturn, the two years of cash you’ve planned for in your “short-term bucket” will now stretch further... making you more resilient overall to the market’s downturns. But if you plan accordingly, a market downturn should not necessitate a spending change.
Again, if you feel this could be helpful to friends and family, please send it along. We welcome an introduction to those you think most highly of.
Thank you for your continued trust. It’s an honor to work alongside you.