The past couple of weeks have been a roller-coaster ride for investors, with the stock market clocking in record single-day losses and officially hitting bear market territory. If you're years away from touching the money you have in stocks, the smartest thing you can do right now is sit back, wait for things to stabilize, and leave your investments alone. But if you're planning to retire in the very near future, that may not be an option.
So should you delay retirement in light of recent market volatility? You probably should -- but that's not the whole story.
How much should your retirement plans change?
If you're planning to retire in a year or two from now, don't panic -- despite the massive downturn we're in the midst of, that gives the stock market some time to recover from recent events. As long as that milestone is at least a year away, keep tabs on the market -- but don't assume your plans are off or need to change all that much just yet. On the other hand, older workers who are planning to retire in the next six months, or at some point in 2020, have more to think about. If you're one of them, your best move may be to postpone retirement until the market does a better job of settling down and portfolio values recover. But that may not throw your plans so far off course.
You see, the average bear market lasts about 14 months. Now if you were planning to retire in June 2020, you may need to come to terms with retiring in 2021. But you don't necessarily need to resign yourself to delaying retirement by three years, five years, or more. It's easy to look back to the Great Recession that lasted years as a benchmark of what extended downturns looks like, but remember, that was an extreme situation -- not the norm. Furthermore, the current downturn we're facing was fueled largely by COVID-19 fears and speculation. That's a situation that may get worse before it gets better, but hopefully, once things calm down on that front, better news will help the market recover faster. (Of course, we don't know how and when that situation will resolve, so recovery could be a bit longer, too.)
Another thing: When the market declines, you have a prime opportunity to buy up quality stocks on the cheap. Therefore, if you don't retire within the year but continue working and generating earnings you can invest, you might actually boost your long-term retirement income substantially.
Be mindful of Social Security, too
Another benefit of delaying retirement is that it gives you an opportunity to hold off on filing for Social Security. For each year you delay benefits past your full retirement age (either 66, 67, or somewhere in between, depending on the year you were born), you can boost them by 8% -- and that's a lifelong increase, in case you weren't sure.
Why is that important? Well, aside from the general advantage of having more money coming in each month, a higher benefit also buys you a little protection in the face of future market downturns. Once you're retired, you're apt to start withdrawing from your retirement savings consistently. But what if the market tanks again a year or two after you've left the workforce? At that point, you may not have the option to leave your investments alone completely -- but a higher Social Security benefit could allow for lighter withdrawals, thereby minimizing losses in that scenario.
When retirement is right around the corner, the last thing you want is the stock market to crumble to pieces. But since you can't control how the market moves, your best bet is to react strategically when things don't go the way you'd like them to.
While delaying retirement may not be ideal, it's a smart short-term move that could save you a world of financial stress in the long run. And if history repeats itself, your plans hopefully won't get too derailed.