Don't Let Your Retirement Account Trick You Into Retiring During a Stock Rally

By Charlie Wells March 14, 2024 Bloomberg

The stock market is up. The chances of a recession soon look slim. And the number of retirement plan millionaires has surged close to a record. It’s enough to make anyone on the tail end of a long — and maybe even not so long — career take a look around and think: Is now the time to retire?

It’s a good question, particularly after Covid-era uncertainty and 2022’s market slump left a big chunk of Americans feeling too financially vulnerable to leave the workforce. Now that stocks have been on a tear for well over a year, is there a case for seizing the boom before a bust? I called financial advisers across the US to find out.

The consensus view from the advisers I spoke with was that someone who’s been waiting for an up market to retire is doing something they, as advisers, caution against: market timing. Emotionally, it may feel great to tap out when stocks are up, notes Marguerita Cheng, head of Blue Ocean Global Wealth in Gaithersburg, Maryland. But rushing to cash out of hot stocks may lead aspiring retirees to forget they have other goals to fulfill for a financially healthy retirement, too. These might include paying down high-interest debts or waiting longer to claim more Social Security benefits.

What’s more, retiring in an up market may give investors a false sense of future return assumptions, warned Craig Toberman, a partner at Toberman Becker Wealth in St. Louis. The S&P 500 is up 31% over the past year. The Nasdaq 100 is up 48%. Gains like that are unlikely to continue over the long-term and might give retirees too rosy a picture as they plan out their post-workforce portfolios. Toberman said he’s seen clients who actually retired during the bottom of bear markets make out well because they had conservative return assumptions of about 6%-7% in the stock market and have now been surprised on the upside.

In an ideal world, prospective retirees would have financial plans so rock-solid they could be triggered in any market and ideally see few immediate effects of either a bull or bear turn. A big part of that strategy involves having a sizable cash or cash-like allocation to cover at least a few years of expenses in retirement. For Cheng, that figure is roughly three years of expenses saved in liquid, easily accessible assets. Having such cash on hand helps prevent selling other, higher-return generating investments if the market does fall.

How do you get that cash? Frank Paré, founder and president of PF Wealth Management Group in Oakland, said today’s elevated market may give investors an opportunity to rebalance; taking profits on investments that have done well and moving them into a cash allocation. This does not mean selling out entirely from the market. But rather using wins to lock in a comfortable reserve.

That’s harder to do than it sounds, particularly for the Baby Boomer set.

“That generation has seen a bull market for 50 years now and they assume that it will continue for the next 50 years,” said Toberman. “It’s not a 100% guaranteed that it does.”

Bull runs end. So do careers. It’s time to start preparing.

© 2024 Bloomberg L.P.

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