Green Retirement Blog

Should I retire in a recession?

Recent losses in the stock and housing markets, predictions of a prolonged recession, and a dramatic rise in food, health and fuel costs, have caused many Americans to push back their retirements. Dashing hopes of an early retirement, and resigning themselves to waiting until they are eligible to receive Social Security, before they can retire.

If we are entering a long downturn in the economy, a recession that could last a few years, as economists are warning. Then retiring now, could actually leave you better off financially, than if you continue working and increase your savings.

Bob and Ed’s Semi-Excellent Retirement Adventure!

Let’s take Bob and Ed, and compare what happens to their retirement portfolios, if Bob decides to retire and Ed delays retirement and continues working. Both Bob and Ed, have taken recent losses because of the recession, and their net worth’s are $300,000 each.

Bob says “I’m done! I’m taking my losses. Investing what’s left of my money in crappy government bonds. When the recession ends, I’ll move some of my money back into stocks and housing, but I’m not delaying my retirement because of a stupid recession!

Bob takes out a safe 4% of his savings every year in retirement. The recession ends in three years. What happened to Bob? At the end of the recession, Bob’s net worth has declined to $281,403, a loss of 6 percent.

After the recession has ended, and the stock market finally begins rising again, Bob re-allocates his assets into a standard retirement asset allocation model. He earns 9% a year on his investments. The expansion cycle lasts 5 years. Eight years after retiring, Bob has a net worth of $364,000 a 21% increase, even after taking out $1,000 every month.

Meanwhile, on the other side of the cubicle wall….

Ed is freaking out! “I can’t retire now, not after my losses in the stock and housing markets, I have to keep working and increase my savings.” Ed had been saving $1,000 a month, towards his retirement, and increases it to $1,250. He reads personal finance magazines, watches financial t.v. shows, listens to financial radio shows, subscribes to newsletters, chases high return stocks, mutual funds, global hedge funds, considers trading in options. And none of it works.

It’s a recession, a world-wide slow down in growth, foreign stock markets get hit even harder than the U.S. markets. And Ed, no matter how hard he tries, still loses 15% a year during the recession. Starting with $300,000 and adding $1,250 per month, at the end of 3 years, Ed has a net worth of $226,709. Ed has lost 25% of his net worth.

Ed is more than stung, he is despondent, finally weary and bleary eyed from reading stock symbols in the Wall Street Journal. Ed pulls his retirement savings out of stocks, and puts his money and $1250 a months savings into a CD paying 3%, and enters the commute lane for yet another day. Five years later…

Eight years after Bob retired, Ed finally gets back his original $300,000, and decides to retire. Bob has been laying in a hammock for eight years, happily retired, and now has $364,000.

Retire Now!

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