During the pandemic, millions of Americans wound up getting rich off their stock portfolios or real estate holdings and are heading into early retirement. But such a move could still be risky. After all, as Sharon Oberlander, an adviser at Merrill Lynch Wealth Management, told the Wall Street Journal, “People forget that markets go down,“ and some early retirees may have “an exaggerated sense of optimism about future returns.”
Federal Reserve Bank of St. Louis senior economist Miguel Faria-e-Castro notes that more than four million people left the workforce during the pandemic – and more than one-third did so in part thanks to rising portfolio and home values. This helped push the percentage of retirees in the U.S. population to 19.4% as of October 2021, up from 18.3% in early 2020.
One reason workers feel more confident about their nest eggs is because of the performance of the pandemic-era stock market. The S&P 500 has risen 79.4% since March 31, 2020, including dividends. Another reason is the housing market, which the pandemic caused demand to hit the roof. According to the National Association of Realtors, the median existing home price leapt 17% in 2021 to $346,900 – a record.
But there are still risks associated with retiring early. For one thing, if you leave a job early, you surrender the ability to save, which means your holdings must last longer.
Another challenge is that it can be easy to underestimate expenses, including for health insurance, before Medicare begins at 65. Not to mention, if any sort of market correction takes place early during retirement, losses can be amplified and harder to recover from.
And while many people got rich – on paper, at least – from 2020’s bull market, the volatility of equity markets in 2022 thus far shows how fickle these numbers can be. The S&P 500 fell 5.3% in January. Nasdaq retreated even further. And industry observers are predicting lower returns in the future.
According to financial advisors, planning carefully is essential when making any early retirement decision, with some advisers suggesting that investors dial back on riskier investments or reduce spending targets to increase their chances of making their money last.
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