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Opinion: Thinking of retiring early? Stress-test everything first

MarketWatch logo MarketWatch 5/6/2019 Peter Morici

With stocks trading near record levels and swelling retirement balances, no doubt many folks in their 50s and early 60s are considering, perhaps for the first time seriously, retirement. A few cautionary notes are in order.

Folks who keep working often live healthier lives — even the prospect of retirement can increase mortality. And you should stress test your venue, your retirement and income portfolios, and anticipated leisure pursuits. Retirement is like your first days at college—full of surprises.

With tuition and mortgages now paid, you may be daydreaming of endless fly fishing or needlepoint, and escaping winter snow or summer heat by moving to places where you now vacation.

Those may be great places several weeks a year but might not suit you as a permanent residence. Affordability, access to family, comprehensive medical services, and climatic preferences all need to be considered.

A quick Google search will yield a wealth of information about the best places to retire and MarketWatch provides a guide to the most affordable. It’s prudent to visit likely venues at least three times.

Related: Here's where you should retire based on what’s important to you

Scout visits to compare several likely locations, follow-up visits to two or three finalists with realtors to estimate affordability, and finally a month or so off-season dress rehearsal of your retirement routine.

Nantucket is great in the summer—but winters are long and you may not blend well with year-round residents, busy with working lives and raising kids.

Dedicated retirement venues pose risks too. Golf communities have been forced to close courses for lack of new memberships as residents turn over. Conflicts sometimes emerge as younger, more affluent retirees arrive and homeowners’ associations impose assessments for new athletic facilities and other upgrades.

Stable, diverse communities — affluent enough to keep the streets paved and most folks gainfully employed but with enough retirees to keep you company in the winter — may be best.

What you can afford requires careful attention to leaving enough in retirement investments to supplement Social Security and pensions.

Children may be off the payroll but life can still be expensive. Medical costs are higher—affluent, reasonably healthy couples can easily spend $20,000 a year or more to maintain the level of service they enjoyed while working.

Retirees travel and pursue more leisure activities. If you can get along reading what’s available in the public library, great! Otherwise expect to spend more money to occupy leisure time.

Whether you stay in place or move, your residence will occasionally require big-ticket items like a new roof, furnace and replacement kitchen and laundry appliances.

During prime working years, you should invest the money for college tuition, weddings, a new car and other major contingencies in money market funds and a ladder of CDs or Treasury with up to seven-year maturities. And place retirement savings in an S&P 500 index fund or similar vehicle. About 10 years prior to retirement, gradually rebalance the portfolio to 50% in fixed-income and stocks.

At retirement, if you can meet your realistic expenses withdrawing 3.5% a year from each pot, your money should last 35 years. That is a prudent planning assumption for a couple in reasonably good health at 65 or so.

However, a recession early in retirement can cause a crisis—you may be selling stocks at a time when prices are depressed. Though a recession does not appear imminent, most economists still worry about the next few years.

It’s best to stress test your portfolio.

During the last two big financial meltdowns—1973-1975 and 2007-2009—the S&P 500 dropped 57% and 48% —but we are unlikely to see anything like those in 2020 or 2021. During the other eight post-war recessions, the average decrease was 21%.

To determine if you can reasonably weather such a shock, calculate if you can rebalance your portfolio to maintain 50% each in stocks and fixed-income assets and still live on 3.5% of the remaining portfolio value if equity prices suddenly drop 25%, stay down for two years and then gradually recover over the next five years.

Just like the banks, a stress test asks if your fixed capital—in your ladder of CDs and similar securities — would be adequate to see you through. If not, you should consider working a few more years.


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