Is NOW still the right time to retire?
February 19, 2025: that was the last all-time high of the S&P 500. Since then, volatility has increased, and global markets have sold off. Looking back, that peak seems so far away. But what if we looked further back…to 2023 & 2024?
The S&P 500 hit 45 and 57 all-time highs, respectively, during the prior two years. Over those 24 months, year over year volatility was essentially non-existent with the biggest drawdowns (calculated using the closing price of the previous year to the lowest S&P 500 price during the following year) LESS THAN 2%!
Although there were some pockets of volatility in the very short term (similar to what we’re seeing now), the longer the time frame, the smoother the ride. Since 1980, the S&P 500 has typically seen 3 to 4 pullbacks of over 5%, one pullback of over 10%, and an average maximum intra-year drawdown of 13% each year. Despite these fluctuations, the S&P 500 has still managed to average an annual gain of ~12% over the same period.
So, what if your retirement clock was set to count down to this month? If you are now relying solely on your investment portfolio to generate income to keep your lifestyle intact, read on.
Focus on the retirement what's vs the when
Instead of asking yourself "when can I retire", ask yourself "what does retirement look like to me?" There are many answers to this question: travel more, buy a second home, downsize, upsize, start a business, sail the world, etc. The answers are endless which means that your financial needs & wants can vary significantly...and can change year by year.
Wants vs needs
Once you establish the "what's", it’s time to start building the plan to set financial goals that you need to hit. The biggest fixed expense for retirement is usually healthcare. This is a NEED. Other "needs" include utilities, food, clothing, and shelter. Basically, what you'll need to live comfortably in retirement.
Everything else is just a "want." Those include the "what's" we listed above and should be prioritized and have a set time frame. An example would be vacation. It can be a high priority in the first 10 years of retirement, but after that, it can become less of a priority, a lower cost, or may even completely disappear from the plan.
The retirement lifestyle Spending Smile
Most people approach retirement planning all wrong as if they’ll spend the same amount year after year throughout their retirement. They'll look at current expenses and automatically assume they can just forecast them out for the next 30+ years. This assumption certainly makes the planning process significantly simpler, especially when looking at a spreadsheet, but it’s not realistic on how people actually live.
When planning for retirement expenses, I have found that it's best to look at a retirement lifestyle spending as a smile. Spending desires (and needs) change over time, and if you think of it as a smile, the early years of retirement are when people want to take advantage of everything they weren't able to do while they were working: i.e., travel, hobbies, major purchases, etc. As retirement goes on, and you physically slow down or have pretty much done everything you wanted to do early on, expenses start to decrease.
The final ramp in retirement expenses usually has to do with health expenditures. The older you get, the more expensive it becomes to live, especially if your health deteriorates. It is at this point, where the spending smile goes back up, especially if proper insurance planning wasn't done early on.
Some good news!
The fact that most people perceive retirement spending as a straight line can usually be a good thing because they tend to save "too much" and usually end up pushing retirement a little further out than originally planned. Another piece of good news is that for the first year of retirement, people tend to be a little conservative on their spending habits.
Although they wanted that boat or vacation home; I find that once the work paycheck stops, they tend to wait a few months to see what it's like to live on a fixed budget. Again, initially spending less than they have saved and we have planned for them.
You retired, the market dropped, now what?
After years of working and saving and planning, you decide to pull the trigger and within 6 months, we have financial Armageddon. What can you do to weather this worst-case retirement scenario?
Figure out what your fixed expenses will be over the next 12 months...and add 10%. Home heating, electricity, gas, food; these are going to be higher for the immediate future.
Once you have your expenses laid out, ask yourself what can be offset by your fixed income portfolio? The current high-interest rate environment is a benefit to retirees because fixed income investments continue to pay a higher yield and provide an attractive income source that can pay well into retirement and help dampen some of the market volatility.
Now is also the time to rerun the financial plan with your current portfolio values. As I have mentioned in prior blogs, financial planning is never static...it's always evolving just as our lives change. A plan that was built just two years ago is going to look significantly different today. It will probably still work, but the numbers need to be adjusted for (potentially) lower assets and (probably) higher expenses.
Bad timing should never be the retirement killer. There is never a perfect day to stop working because waiting for the ideal market environment will not happen. Instead, set reasonable expectations on returns, plan for future expenses, and then enjoy what you worked so hard to achieve! The time to retire can be NOW...if planned properly.
-Jason
Any opinions are those of Jason Macaluso and not necessarily those of Raymond James.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.
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