Rui Yao is an assistant professor of personal financial planning at the University of Missouri. She says near-retirees often meet their retirement savings goals during an up market, and that tempts them to retire. But the danger in that strategy — the potential to lose their cushion when the market goes south — is all too real.
“The economy runs in cycles, meaning that after a peak, the market will take a downturn,” she says, likely causing savings to decline. “This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives.”
In her study, Yao examined data from more than 4,000 households with retirement-aged Americans from 1992 to 2008. She found that people were more likely to retire in years in which the financial markets were up — every 1 percent increase in market returns increased the probability of retirement by more than 2 percent.
Yao also found that workers with a retired spouse were more likely to retire than households in which both spouses were working (hardly surprising).
So if we shouldn’t retire in a down market, and it’s not especially wise to retire in an up market, then when should we retire? (If you answered, “Never,” you may be on to something. But that’s for another blog post).
Here’s what Yao recommends: Reach our savings goals, retain them during a downturn, and then consider retiring. Once the markets recover, our savings will increase above our target, and we’ll have an adequate cushion to get us through future downturns.
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