Published October 05, 2012
Individuals are more likely to retire during peak economic times, but that may be setting themselves up for rocky finances later. That's according to a new report from the University of Missouri and published in the Journal of Personal Finance.
Rui Yao, an assistant professor of personal financial planning at the university, reviewed the financial and retirement statuses of more than 4,000 U.S. households containing retirement-age individuals between 1992 and 2008. The data indicated that a 1% annual increase in market returns increased by 2% the probability that a retirement-age individual would leave the workforce.
The correlation between a growing economy and more people deciding to retire may stem from the fact individuals are more likely to hit their retirement savings goals during an economic upturn, Yao said in the press release. But she cautions that retiring as soon as those goals are met can cause big problems later.
What goes up ...
"Potential retirees often will first meet their targeted retirement savings goals during an up market and will be tempted to retire at that point," said Yao in a statement. "The problem with this strategy is that the economy runs in cycles, meaning that after a peak, the market will take a downturn."
For individuals who retired when they had only just met their savings goals, a downturn can mean significant loss for stock-based retirement funds such as 401(k)s and IRAs.
"This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives," said Yao.
She recommends individuals delay retirement during an economic boom, particularly in instances in which a savings goal has just been met. Continuing to work during an up economy can bring in needed income to create a savings cushion that will withstand an inevitable downturn.
Yao also says it is better to retire in an economic downturn so long as an individual has saved enough to live comfortably. Then, as the market improves, retirement funds will get a boost to further help sustain them in the long run.
Married couples tend to retire together
In another finding of the study, it was confirmed that spouses tend to retire together -- something conventional wisdom has long suspected.
Workers in a household with a retired spouse were more likely to retire as compared to those in a household with a working spouse or those living alone. While retiring together may seem natural, it also holds the potential to cause financial problems, Yao said.
"It makes sense that many married couples would want to retire around the same time," Yao said. "However, if both spouses decide to retire close to the end of an up market, the household would have little to no cushion should their retirement portfolios be affected by an economic downturn."
So while it may seem attractive to retire at the same time as a spouse, if one partner is still inclined to work at least part-time, it may be a barrier against a downturn eroding the couple's entire savings.
The original article can be found at Money-Rates.com:
Booming economy? Better keep working