You’ll be retired by this time next year. Here’s what to do now
You’ve scrimped and saved and planned for decades, through good times and bad. Now your goal is to retire in this uncertain environment, perhaps in the next year — even though the last six months have been, well, nerve-racking, economically speaking.
In July, the Labor Department reported the Consumer Price Index jumped 9.1 percent in June, its biggest year-over-year increase in 41 years. The Federal Reserve raised its short-term fed funds rate three times in 2022, and has indicated that more interest rate increases may be in the offing to slow the U.S. economy and tame inflation. Russia’s war with Ukraine has rattled the global economy, driven up the price of oil and raised gasoline prices for consumers. The Standard & Poor’s 500 stock index is in a bear market, pummeling retirement accounts, and there’s talk of a recession.
Avoid the headlines and maintain perspective
How can you weather tough times and successfully move on to the next stage of your life? To begin with, focus on what you can control, says Tracy Sherwood, of New York. “In times of market volatility, that’s spending, saving, portfolio diversification and managing your emotions.”
It may also help to review some basic facts. While distressing, bear markets are normal. They occur when the stock market declines 20 percent or more from its most recent high. As of June 13, the Standard & Poor’s 500 stock index, the benchmark for measuring the performance of 500 of the largest U.S. stocks, had dropped 21.8 percent from its peak on January 3 of this year.
And though the past doesn’t predict what will happen in the future, reflecting on past events can be a useful exercise. Since 1926, there have been 17 bear markets, and they’ve lasted an average of three and a half years. Some, but not all, have been accompanied by recessions, which are defined as two consecutive quarters of declines in the gross domestic product (GDP). The last recession, in 2020, which was brought on almost exclusively by the global pandemic, ended after just two months.
Seek expert advice to cover your bases
Can you retire in a matter of months? Should you pull the trigger? That’s a major decision. Some experts say you can do it, provided you take steps to safeguard your nest egg as best you can. “We’re getting the question almost daily from our clients,” says Matthew Boersen, “Our answer is yes!”
Here, financial planners from around the country offer their advice for making this transition wisely, despite the troubling economic and geopolitical news.
1. Stress-test your financial plan
It’s essential to create a well-conceived plan, if you don’t already have one, says Sherwood. “Our clients have clarified their immediate, short-term and long-range goals. We’ve identified a retirement income strategy, retirement income they can rely on, and parameters for when it may be prudent to spend less or more.” If you need an adviser to help you create one, visit letsmakeaplan.org to find one in your area.
Your financial planner may recommend three types of investments — safe cash, such as bank CDS and money market funds; bond funds, which carry a moderate level of risk; and stock funds, which have the most risk. The allocation of these investments in your portfolio should correspond with your tolerance for risk.
Recent losses in the stock and bond markets may be making you uneasy. If you devised your plan in better times, ask your adviser to review it to make sure it’s still on track, says Zachary Bachner. There are retirement forecast tools can help determine whether inflation or the bear market may derail a client’s goals. “If we input higher levels for inflation or updated account values, and they still yield a successful illustration, then it helps to put the client’s mind at ease.”
2. Shore up your position with cash and a realistic budget
Every retiree should have a budget, and if you don’t have one, make one. (AARP has plenty of budgeting tools if you need them.) And although many planners say that you can live on about 85 percent of your pre-retirement income, many early retirees say they spend the same amount as they did before they retired — and sometimes more. Give your budget a test drive before you retired to see if it’s reasonable and if your income and the cash in your savings are enough to sustain your lifestyle. If not, look for expenses you can reasonably reduce,
But how much cash should you have right now? For clients preparing to retire in 12 months, Michael McDaid, suggests three years’ worth of living expenses. If they don’t have it, he encourages adjusting as needed. “Depending on their resources, they may need to reconsider their target retirement date,” he says.
Why so much cash? You shouldn’t take withdrawals in a market downturn, such as the one we’re currently experiencing. Let’s say that your stock fund is down 15 percent and you withdraw 4 percent: Your account drops 19 percent. Once retired, you’ll have no way to cover these losses.
If you have big travel plans, make sure you have the cash on hand to pay for them. “If a large expense can be delayed until the market recovers a bit, then the impact won’t be as great,” Bachner says. Be sure to consult your adviser about the appropriate rate of withdrawal for your situation.
Another option is to find a temporary or part-time job to help reduce the need for retirement withdrawals, Bachner says. “Every dollar earned will allow your assets to remain invested until the market starts to head higher again.” If you do retire soon and must take withdrawals, it’s best to take them from cash.
3. Leverage the opportunities right now
Strange as it may seem, you can make this market downturn work for you, says Boersen. For example, if your traditional, tax-deferred IRA account has dropped in value, now may be the time to convert all or a portion of it to a Roth IRA. You’ll pay less in taxes now than you would have when your account balance was higher. However, if you must rob your cash stash to do so, then you’ll want to reconsider.
In addition, now may be time for tax-loss harvesting, provided you have a taxable account. That is, you sell an investment that’s underperforming and losing money, and use that loss to reduce your taxable capital gains. You can offset up to $3,000 of ordinary income and reinvest those funds according to your asset allocation strategy. Keep in mind, though, that the benefits of tax-loss harvesting don’t apply to your 401(k) or IRA accounts because the IRS doesn’t allow you to deduct the losses that occur in a tax-deferred account. This is another subject to discuss with your financial adviser before making any moves.
4. Make sure you have your health care covered
A major medical event, such as a heart attack, can send your retirement plans off the rails if you don’t have adequate health insurance, either from Medicare or your spouse’s medical insurance or through the private market. If you choose a high-deductible plan, make sure you have enough in savings to pay the deductibles. If you’re using Medicare, make sure you budget for vision or dental care, which Medicare doesn’t cover.
5. Tune out the noise and keep the faith
Finally, Bachner warns against panicking should the market continue to pull back. Remind yourself that any losses you’ve suffered are on paper. Resist the urge to move into cash, as doing so will lock in those losses for good. He says it’s best to remain invested and expect the market to rebound in the future. “That said, we are taking this opportunity to ensure that clients are invested appropriately, according to their risk-tolerance level. This year’s market volatility has made some people realize that they’re not as aggressive as they thought they were.”
As hard as it may be, zoom out and think long-term, Boersen says. “Returns for 2022 may be negative, but if you look at performance over longer periods of time, even two to three years, the returns are still incredibly positive.”