Returning to Work Because of Down Markets?

Heading into retirement can bring a lot of emotions, ranging from excitement and relief to anxiety and fear.

We believe going through several critical exercises in advance of your career transition can help provide confidence and a vision for your life in retirement. These exercises include performing important financial calculations on your cash flow and assets, and planning for how you will spend your time.

Many investors who are able to retire have maintained consistent financial discipline for years, saving with each paycheck and building an investment strategy oriented toward long-term growth.

However, retiring right before or during a market downturn can be scary and may cause you to question whether your plan will be blindsided by a tough market. Questions such as, “Did I make a financial mistake by retiring now?” or “Will I need to go back to work?” are commonly asked by people who have recently retired.

If you recently retired, here are three thoughts to consider when evaluating your work plans:

1. Some form of work in retirement can help buffer the financial impact of a down market

Many people still “work in retirement,” even though they may consider themselves retired. A lifelong set of skills can generate continued impact even if it’s not in the scope of a full-time job with an office commute. Depending on your skill set, the options might be plentiful and could be part-time, volunteering, teaching, consulting, or taking the off-ramp by scaling down hours, if possible. Choosing to work in retirement isn’t always a binary decision; if you need or want to work, you may have more options than you think.

While you may not “need” to work, every dollar you earn could reduce your distribution needs and allow your portfolio more time to recover through a down market. Additionally, studies¹ have shown that work can have other benefits beyond financial, such as relational, mental and emotional.

2. A temporary reduction in spending could have a lifelong effect

Retirees with no debt, a lower cost of living or work income may have more flexibility when adjusting through challenging market cycles. They may have expenses that can be put off, such as a home renovation, to maintain higher liquidity or they may choose to spend less from portfolio assets.

Allowing time for the markets to recover could translate into more wealth for future expenses and goals. However, be realistic with your spending flexibility. Many new retirees may initially experience the feeling that every day is the weekend, making it harder to reduce spending during the first couple of years.

The freedom of time, combined with the desire to travel or purchase a new home, may lead to higher spending compared to what may be their average level of outflows once they reach a “new normal,” usually after a couple of years of retirement. Giving yourself some grace while maintaining some of the disciplines that got you to retirement is a key to successfully navigating this balance.

3. Markets don’t always need to be up for your retirement journey to be successful

Historically, over the long-term, the stock market has tended to rise in value. This is good news for long-term investors, including retirees, who invest most of their wealth in the financial markets. However, anyone planning for retirement should expect that the markets will go through challenging stretches, potentially early on in their retirement. We believe their planning should not assume that larger investment returns make up for a consistently high portfolio withdrawal rate.

A common industry rule of thumb is the 4% rule, which states that over a 30-year timeframe based on owning a diversified stock and bond portfolio, a retiree withdrawing an inflation-adjusted 4% per year would have a very low probability of running out of money. This research is based on historical market data going back to 1926.² Experts have been making arguments as to whether a sustainable withdrawal rate should be lower than 4% for the foreseeable future. Still, the point in general is that if a retiree is withdrawing within a prudent percentage range, then the probability of having enough assets that could last their lifetime remains high. If your portfolio withdrawals are above this range, you may need to find ways to reduce your expenses or generate additional income, potentially including some form of paid work.

If you were able to already retire on your terms, it’s a good reminder that a lot of positive news over many years brought you to where you are today. Morgan Housel, author of The Psychology of Money, said, “Bad news tends to happen fast while good news moves slowly.”³ The compounding of wealth doesn’t only occur during your working years when you are setting aside money each paycheck. It may happen more slowly in retirement, but it’s still a powerful force that can set you up for success in the future.

Ultimately, while accumulated wealth may allow someone the opportunity to retire, we believe a financially successful retirement is not exclusively about the size of your portfolio. In our view, what truly matters in the calculations is how much you need compared to your level of financial assets. Retirees with a low withdrawal need compared to their investments, or those who can generate additional earned income, may not need to worry about the state of the markets as much as some of their contemporaries.

¹ https://www.aarp.org/work/careers/working-after-retirement/
² https://www.forbes.com/advisor/retirement/four-percent-rule-retirement/
³ https://thehustle.co/07142022-morgans-musings/

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