Planning for retirement is more difficult now. A combination of the COVID-19 pandemic, high inflation, and a plunging stock and bond market caused many Americans to rethink their retirement plans.
A declining stock market is especially impactful on those who plan to retire in the short term. Those plans were seriously upended by the sharp decline in their portfolios, causing experts to caution that “2022 has been a dangerous time to retire.”
The vulnerability of these retirees was caused by the “sequence of returns” risk. When you withdraw money in the early years of your retirement from a portfolio that has sharply declined in value, you run a higher risk of running out of money in later years.
Charles Schwab compared the portfolios of two investors. Each started with $1 million portfolios, took initial withdrawals of $50,000 (with 2% inflation adjustments each year), and incurred a 15% drop in their portfolio value. The investor who faced this decline in the first two years of retirement ran out of funds after 18 years. The investor who experienced this decline during the 10th and 11th year of retirement still had $400,000 remaining after the same period.
Adding to the uncertainty was the requirement that many employees abandon the office environment and work from home. According to a study by Garner, Inc, after COVID-19 was declared a pandemic, 88% of organizations encouraged or required employees to work from home.
As pandemic restrictions eased, some employers made returning to the office optional while others required it, causing some of those employees to reconsider how and where they wanted to work – or if they wanted to work at all. One study found that 30% of employees would rather quit their job than return to the office.
As you plan for your retirement, you may find it helpful to review the latest facts and trends in retirement planning. Doing so can help you prepare for uncertainty and avoid making mistakes in your own planning.
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