Why Now Is a Great Time to Retire, Despite Inflation and Sinking Stocks

With soaring inflation and crashing stock markets, you might think this is a bad time to retire.

However, counterintuitive as it may sound, the prospects for those who retire today are better than they were a year ago, according to findings from Morningstar.

Stock valuations have plummeted, and bond yields have risen this year. Those trends point to higher returns for retirees in the future, Morningstar said.

For example, last year, Morningstar Investment Management’s (MIM) 30-year forward equity return assumption ranged from 6% to 10.5%.

However, the 2022 forecast increases that projection to between 9% and 12%.

As for fixed income returns, today’s improved yields have led MIM to increase its 30-year forecast from less than 3% last year to around 5% this year.

Given these better estimates, Morningstar says retirees can safely spend 3.8% of their portfolio each year – with increases to offset inflation in coming years – if they hope to retire over 30 years. That’s up from 3.3% last year.

Withdrawal advice assumes that a retiree has a portfolio consisting of 50% stocks and 50% bonds.

It can be hard to fathom the concept that retirement prospects are any better this year than they were in 2021. After all, last year, the Standard & Poor’s 500 index jumped about 27%.

By contrast, 2022 has been one of the worst years for the S&P 500 in the last century.

But as Morningstar personal finance director Christine Benz told the Wall Street Journal:

“It’s counterintuitive, but when valuations are high it’s the worst time to retire.”

Morningstar notes that those looking to withdraw 3.8% of their portfolio are most likely to avoid running out of money if they keep between 30% and 60% of their money in stocks and the rest in bonds.

Less than 30% in stocks increases the risk that you won’t generate a large enough return to cover three decades of expenses in retirement.

On the other hand, allocating more than 60% of your money to stocks increases the risk of being hit by a severe bear market and not being able to recover your losses.

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