Can I Retire Now?

As we plan to go back to school and potentially back to the physical office place this Fall, some Americans are wondering whether going back to the daily grind is worth it at all. As of June 1^st, 1.7 million more workers age 55+ retired sooner than expected due to the pandemic.¹ According to the Federal Reserve’s 2020 Report of the Economic Well-Being of U.S. Households published this past May, “Twenty-nine percent of adults who retired in the past year said factors related to COVID-19 contributed to when they retired.”² Priorities may have changed and the concept of retiring sooner, whether electively or COVID-19 related, has become a real consideration for many. What are some key concepts one should evaluate before getting comfortable with deciding to retire now? Here are a few we identified as important to factor into this decision:

• Asset Allocation – For an average couple age 65, there is a 49% chance that one of them will live to age 90, and a 4% chance that one of them will live to 100. The odds of reaching those milestones are even better for younger couples.³ The prospect of spending more years in retirement then in the workforce will require revisiting your portfolio’s asset allocation. Growth assets, particularly equities, are important for meeting this longer retirement period. You should evaluate whether your risk tolerance reflected in your mix of stocks and bonds is in line with your risk capacity. Risk tolerance is a measure of how much risk you can withstand emotionally, while risk capacity is how much risk you can handle financially. In the end, your tolerance doesn’t mean much if it is not in-line with your required capacity to make it through retirement.
• Inflation Risk – Inflation has been a popular topic this summer, and one that ACM’s Dr. Chuck Lieberman addressed back in July. Whether the current environment is transitory or something else, if you simply assume a historical inflation rate of 3% moving forward, the purchasing power of a portfolio is cut in half in 25 years. Retiring early could mean making your money last for almost double that amount of time. In the current low interest rate environment, the return on a large cash position is a far cry from beating this historical inflation rate let alone something higher. Re-risking your portfolio and putting cash currently held on the sidelines to work in return seeking assets works to counter long-term inflation.
• Withdrawal Strategy – In May, ACM’s Director of Financial Planning Jeff Deiss wrote in detail about how the sequence of returns along with your withdrawal rate matters during retirement. Low or negative returns, especially early on in taking distributions from a portfolio can be detrimental. Having to sell when markets are down, due to normal volatility, can place significant strain on your savings. Applying a dynamic withdrawal strategy, as opposed withdrawing a fixed percentage grown with inflation, addresses concerns of overspending during a volatile or down market. Dynamic spending rules are designed to change retirement distributions based on market conditions and inflation, while keeping you invested for the long-term. In addition, they can provide “guardrails” to adjust your annual withdrawals, either up or down within limits, to prevent you from over spending in down markets or even underspending after periods of growth.

In portfolio construction, owning individual stocks and bonds gives a manager the ability to drill down to the individual holding level to sell out in a tax efficient manner while keeping holdings they believe are best positioned to bounce back. Pairing this with a dynamic withdrawal strategy can help you stay on track through your extended retirement.

• Retirement Income Sources – Income can come in many forms during retirement, not just from your portfolio. Having an optimized income strategy to solve for when to elect taking guaranteed income sources like Social Security and if available a pension is invaluable. Solving for income isn’t necessarily one size fits all. You can apply a strategy tailored to your priorities, whether it be maximizing your lifetime benefit, finding tax efficient ways to make more gifts during your lifetime or avoiding an unnecessary income tax increases by taking distributions or elections at the wrong time to move you into a higher income tax bracket.

These considerations are all unique to each person’s situation. That’s why the most prudent thing to do when evaluating if an early retirement can be an option for you is to work with your ACM Advisor to construct and monitor a comprehensive financial plan, that works in tandem with your long-term investment strategy.

1The New School Schwartz Center for Economic Policy Analysis, June 1, 2021 “The Pandemic Retirement Surge Increased Retirement Inequality”. 2Federal Reserve Research & Analysis Report Economic Well-Being of U.S. Households in 2020 – May 2021. 3IRS 2019 Mortality Tables, Kitces.com Joint Life Mortality Table.

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