You’ve saved all your life, putting money aside for your later years. Now the time has come to consider leaving the workforce, but its mid-2022 and there’s a considerable unease in the markets. This is causing you sleepless nights and your questioning if now is a good time to retire?
Unfortunately there’s no clear answer and it does depend on your circumstances, but looking at these in some detail, you’ll be in a better position to make an informed decision and if needed, to take action. The good news is that, there is always opportunity in the challenges we face, regardless of how insurmountable they feel! So lets get to it, together.
Speaking to other retirees recently some of the main factors that they and I feel could affect a successful retirement include:
- Cost of Living Crisis
- Looming Recession
- Interest Rate Rises
- Societal pressure
Let’s look at these further.
Cost of Living Crisis
Gas prices have nearly tripled since the start of the Ukraine conflict. Petrol was at its highest price ever in the UK and electricity shows no signs of slowing its ever increasing price trajectory. The increased cost of living is not only putting increased budgetary pressure on households, but many are going into debt or choosing whether to heat their homes or feed their families. For many, this winter wil be nothing short of a disaster.
At over 13% currently and with estimates showing inflation hitting 18% within the next 12 months, prices for everyday goods and services are increasing well in excess of wages. The true inflation rate is deemed to be much higher than this and as a result the spending power you have is in decline.
A recession is coming. We don’t know when and we don’t know for how long, but it will be along sometime in the future. I promise you that. This will decrease the value of any stocks and shares you own. As a retiree, drawing down from your shares, will mean that you are depleting your assets quicker and will increase the sequence of returns risk causing you to run out of money in retirement.
Find out why the sequence of returns matters most in your early retirement planning in our upcoming post.
Interest Rates Rises
Recent times of the ultra low interest rate are sadly gone and may not be seen for many many years to come. All data and commentary points to interest rates rising over this next number of years. It’s hard to imagine a 6% interest rate, when lately they’ve been between 1-2%. But consider what a 8%, 10% or even 14% interest rate would look like with your current mortgage value.
In the late 70s, mortgage rates in the UK were 17% and during the 80s they fluctuated between 8% and 14%. It is not unprecedented for high interest rates, yet those under 40 will barely remember the challenges their parents went through in their early years. Don’t let recency bias cloud the fact that interest rates can rise well in excess of todays rate and they might just do that.
If you’re reading this site, then hopefully you are wise to the fact that the Joneses, for all their trinkets and showy gestures, are probably unhappy as fuck.
That said, if people didn’t bow to societal pressure, would we really see so many sports SUVs are the school pickups. And yes before anyone who knows me comments, I was one of those people too…but that was the old me.
I do jest though, as its not just societal pressure that helps us to spend our money. It’s our own internal psyche. We have worked hard all our years and we have saved and invested our money. Why shouldn’t we spend it?
We’ll come back to that in a bit.
What can we do to reduce our financial risk in retirement?
Looking at the challenges faced, its understandable that many are a little reluctant or afraid to consider early retirement this year. I have given it more than a momentary thought, because the propsepect of running out of money can be quite scary.
I’ve had doubts myself and I’ve been working relentlessly towards this time for the past 13 years.
How have I kept myself sane when all about me are losing their minds? Well, I’d describe myself as pragmatic optimist. Optimistic about the future, but pragmatic in that I know we may face challenges, and that there are always steps to overcome these.
If we break it down further and look at the factors that affect us, then we can work to to mitigate this risk pre and post retirement. Here’s some pragmatic and useful suggestions to consider. All of these ideas have been put into practice myself and it is a very liberating/cathartic process.
- Know your numbers
- Reduce withdrawal rate
- Reduce outstanding debt
- Increase bond holdings
- Don’t be the Joneses
- Work a little longer, but not too long
Know your numbers
With an understanding of your net worth, you are in a better position to make sensible decisions around your retirement date. Only you know how much you spend and ultimately how much you will need in retirement.
The confidence of being able to retire will come from your understanding of your finances. Personally I air on the side of caution. I may have saved a little too much, or my withdrawal rate may be too low. But thats a sacrifice I am willing to make, so I can weather any market conditions without breaking too much of a sweat.
Do a little exercise – If your net worth dropped 20% the day before your retirement, how would this affect your withdrawal strategy? Understanding this and making decisions for such scenarios in advance is key.
Reduce your withdrawal rate
The simplest way to make your investments last longer is to spend less. This reduction in withdrawal rate will lower the chances of your running out of money in retirement.
While the 4% withdrawal rate is widely touted as a rule of thumb, there is an arguement to say that its too high and that a more prudent 3% or lower should be adopted for a longer retirement timeframe.
Conversely there are arguments to say that its too low, when you add in state pensions, inheritances and the fact that sadly, many of us will never reach the age of 60, 70 or 80.
But you’re young-ish, healthy-ish and we both know you’re going to live forever. So lets be prudent-ish for just a second. Knowing your numbers, how does retirement look if you reduce your withdrawal rate by 0.5% or 1%. If the worst happens in the markets, are you prepared to reduce your spending to these levels? Consider what you can do to stave this off or the choices you’d need to make now.
We all hope for the best, but planning for the worst, takes the emotion out of your decisions when you make them in non-disasterous times.
Look at your budget. Figure out where you can make savings or what discretionary spending you’d be willing to reduce if needed. Whether you currently feel like it or not, there’s always room to squeeze your budget further. And if you have to, what choices would you make.
Reduce outstanding debt
We’re no longer in the era of super low interest rates and a majority of economic commentators point towards these increasing for the foreseeable future. While stock market returns may have favoured not paying your mortgage off in the past, if interest rates are increasing and the markets are declining, this argument could be flipped. If the markets are in a state of chaos, wouldn’t you sleep easier in your bed knowing that the bank can’t take your home
It may not make sense to pay down some of your debt early. Car loans for example generally have their interest payments paid up front and so paying this down early has no material benefit. You can and probably should mitigate future interest increases by retaining your current car beyond the limit of your current contract. Repeat after me, we do not need this years newest Land Rover.
Increase bond holdings
Under normal market conditions the argument could be made that you should increase your bond position to reduce market volatility. However we’re not in normal market conditions.
- Stocks generally hold up better than bonds to inflation
- Rising interest rates may negatively affect the value of a bond portfolio.
A guaranteed return is one thing, but when the value of this return decreases due to inflation, this may not be the best course of action. Choose your investments wisely and consider all market eventualities.
To be in the position to consider retirement is enviable at any time and in any market conditions. While you must be aware of outside influences, even in retirement, there are many ways we can protect ourselves and even thrive in any instance.
Control your emotions
Once we ensure our numbers work, the consideration becomes less financial and more emotional. It can be hard to overcome the feeling of fear when your investments are in decline and you are no longer contributing, but withdrawing from them.
Content yourself that you have a plan and that the plan allows for flexibility. If that puts your mind at ease, then now is the perfect time to retire. If not, further look to fix your position and make an interim plan to get you to retirement.
No go away and enjoy yourself. You deserve it.