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

Advertising Disclosure: When you buy something by clicking links on our site, we may earn a small commission, but it never affects the products or services we recommend.

Happy woman walking in nature
pixelheadphoto digitalskillet / Shutterstock.com

With inflation soaring and the stock market crashing, you might think this is a terrible time to retire.

However, although it sounds counterintuitive, the outlook for those who are retiring today is better than it was one year ago, according to findings from Morningstar.

Stock valuations have plunged, and bond yields have climbed this year. Those trends suggest higher returns for retirees in the future, Morningstar says.

For example, last year, Morningstar Investment Management’s (MIM) 30-year forward equity-return assumptions 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 increased yields have caused MIM to boost its 30-year forecast from less than 3% last year to about 5% this year.

Given these improved forecasts, Morningstar says retirees can safely spend 3.8% of their portfolio annually — with increases to keep pace with inflation in future years — if they expect to be retired for 30 years. That’s up from 3.3% last year.

The withdrawal suggestions assume that a retiree has a portfolio made up of 50% stocks and 50% bonds.

It may be tough to wrap your mind around the concept that the retirement outlook is better this year than it was in 2021. After all, last year, the Standard & Poor’s 500 index soared by about 27%.

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

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

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

Morningstar notes that those who want to withdraw 3.8% from 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 return large enough to cover three decades of spending in retirement.

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

Get smarter with your money!

Want the best money-news and tips to help you make more and spend less? Then sign up for the free Money Talks Newsletter to receive daily updates of personal finance news and advice, delivered straight to your inbox. Sign up for our free newsletter today.