When Should You Retire?

Obviously, the age at which you retire depends on several variables, including if you enjoy your job and want to work past traditional retirement age and whether your health allows it or your employer gives you a choice in the matter. However, another factor that not everyone considers is what could be going on in the investment markets when you are nearing retirement. This is important because you typically want to avoid retiring just after or during a market decline, as demonstrated in the following hindsight scenario.

In the example, Sam and Susan retired in 2000 with $300,000 hypothetically invested in the S&P 500 with a plan to make 4% annual withdrawals. Note that in the first three years of retirement, the stock market performed poorly – substantially reducing Sam’s long-term annual income. When deciding when to retire, the factor is the ability to be flexible. If market performance is in the period of decline, it may be prudent to delay retirement until the market recovers so that your portfolio does not suffer from an initial negative sequence of returns.

See how this worked for Sam and Susan in the second scenario, in which they delayed retirement until 2003, with the same $300,000 hypothetically invested in the S&P 500 with a plan to make 4% annual withdrawals. Note that delaying retirement until 2003, Sam and Susan's portfolio experienced positive returns in the first few years – substantially increasing his annual income throughout retirement and ultimately doubling his long-term account value.

Bear in mind, too, that by continuing to work a few more years, Sam and Susan also may have increased their level of income from their Social Security benefits. Whatever your retirement questions are, we are here to help.