Following the news that
bull markets make people more likely to retire
-- and that doing so can put their future finances in danger --
it's important for savers to review how market returns can affect
their retirement planning.
On one hand, it's understandable why more retire during strong
market conditions: People have a retirement savings target in mind,
and bull markets can help more people reach those targets. The
problem is, given the normal cycles of market returns, retiring at
a peak could leave you vulnerable to the next bear market.
Ideally, you shouldn't let recent returns influence your
retirement planning too much. Keep these six things in mind when a
run of good returns has you thinking you should retire a little
1. Don't skimp on contributions if you get ahead of
When market returns are strong, people tend to feel they can skip
contributing to their retirement plans, because those returns seem
to be adding to the portfolio fast enough. Market returns need to
be viewed as cyclical, so good returns one year may have to make up
for disappointing returns the next. Meanwhile, savings rates should
be based on your long-term needs, not the current value of your
2. Remember that an early retirement requires more
If you hit your retirement savings target a little early, you might
need a higher target to account for the fact that if you retire
early, you'll have to live off those savings for a longer time.
3. Be sure to account for low interest rates
One of the biggest changes in retirement assumptions in recent
years is the fact that interest rates, from bank rates to bond
yields, are nowhere near their historical norms. That means it
takes a bigger portfolio to produce an adequate amount of
4. Don't retire as soon as your portfolio reaches your
If you hit your target during a bull market, hold off until your
portfolio is large enough to withstand a normal market downturn --
say around 15 percent.
5. Once you retire, don't spend your excess
If you have already retired and your portfolio has a great year,
don't look at those gains as a windfall you can spend all at once.
Just as is the case before retirement, investments need to be
looked at as cyclical, so unusually high returns should be banked
to make up for future periods of low returns.
6. Keep in mind that longevity is a form of risk for
Normally, one would think of death as a risk, but when it comes to
retirement planning, a long life is a form of risk because it
requires more retirement funding. Make sure you've provided for
your needs well
past a normal lifespan
, because you just might have to afford living a few extra
Once you retire, you no longer have the time or income to allow
your retirement savings to make up for market downturns. Therefore,
you want to make sure you build up a cushion against downturns
before you retire -- especially if it's during a hot stock market
that is due for a correction.