Retired baby boomers wiped out by inflation, volatile stock market

Anita Cowles plans to take a river cruise in Europe next year, taking in the sights and sounds of vibrant cities, sprawling mansions and medieval forts thousands of miles away from her Alabama hometown.

She and her husband, Russell, then made plans to go on a three-month road trip in their new RV. These are just two of many trips the couple were planning after Russell retired as a pilot from American Airlines in February, when he turned 65.

But all of that has been put on hold in part because of high gas prices, soaring consumer goods prices and a market downturn that has wiped out about a quarter of the couple’s retirement savings. Since February, the couple’s investments have lost about $500,000 in value, says Anita, 63 Fortune.

“This is a big chunk of our retirement,” says Anita. “It is extremely scary. We thought we were going to do some trips this year but that ended abruptly. You want your money to last.

Photo courtesy of Anita Cowles

The Cowles aren’t the only ones facing severe losses: Retirement balances have declined for the third consecutive quarter this year. During the third quarter, Fidelity’s average 401(k) balance fell an average of 23% from a year ago, according to recent research from Fidelity Investments, which manages about 35 million retirement accounts. IRA balances were down nearly 25% year over year and 403(b) accounts held, the retirement plans typically used by nonprofits, were down 21%.

While these dips are just paper losses until investors make withdrawals, the psychological effects are already hitting recent and early retirees like the Cowles. “Yes, it’s only on paper, but if you keep drawing on that, it’s going to take even longer to get your money back,” says Anita.

The recent market downturn and rising inflation has given many older Americans pause for thought. According to the recent Janus 2022 Retirement Confidence Report from Janus Henderson Investors, nearly half (49%) of people aged 50 and older say they have already reduced their spending, or plan to do so, due to these factors.

However, many are optimistic that inflation and down markets are short-term challenges. A majority of older Americans (60%) believe the S&P 500 index will be higher in a year, according to Janus. And these traces, given that the baby boomers are a generation that has generally recovered well from past economic shocks, especially compared to other generations. While baby boomers experienced the Dot Com bubble in the late 1990s and the stock and housing market crash of 2008, the generation owns an estimated $73 billion, or about 51 percent of all U.S. wealth, according to the Federal Reserve. That’s about nine times more than millennials.

“I know in a year or two I’ll be able to take some of those trips because the money will come back,” says Anita. But there is still a shadow of uncertainty looming. So, in an effort to recoup some of their losses faster, the Cowles discussed Russell going back to work as a pilot for a smaller airline. Just last week he was interviewing for a role. “He’s thinking about going back to work why what if he continues?” Anita says.

“Our biggest disappointment is really just the timing of it all,” she says, adding that delaying travel and potentially not retiring Russell are more important decisions when there are long-term health issues to evaluate. “We’re still comfortable,” she adds, but says all the “extras” like travel and special experiences the couple wished they could have while feeling good financially about it, they can’t now.

How to weather the storm without coming out of retirement

While the decision to go back to work, even part-time, isn’t a bad impetus, there are other ways to weather the double whammy of high inflation and a bear market that retired and retired baby boomers are experiencing.

T. Rowe Price’s research finds that retirement savings hold up in the long run, even when starting out in tough economic and market times. A retirement savings of $500,000 in a 60/40 portfolio of stocks and bonds, for example, invested in 1973, a year marred by an oil crisis that kicked off a bear market, still ended up with a balance of over $1 million at the end of 30 years using a 4% withdrawal rate.

But that kind of research doesn’t mean recently retired baby boomers (or those still looking at retirement) should be complacent, says Gregory Kurinec, a certified financial planner (CFP) with Illinois-based Bentron Financial Group.

“It’s time to step back and do the things you’re supposed to be doing,” Kurinec says. Top priority? Reevaluate how much you’re actually spending on a monthly and yearly basis. Then figure out where that income will come from given the current challenging market climate.

Even with this simple exercise, there are many trade-offs to consider. “The common wisdom is that you should never pull out of your portfolio when it’s down,” says Marisa Rothstein, CFP and personal financial advisor at New York-based Siena Private Wealth.

The natural extension of this wisdom is that early retirees and retirees would have to rely on other sources of income to keep them going until the market recovers: the most common go-to source is Social Security. But if that means filing for Social Security early (the full retirement age is 66 or 67 for most baby boomers), Rothstein says that could be a bad bet. “By claiming Social Security early, they are likely to miss out on the promised growth built into Social Security from each year of delay. The stock market may rebound, but will it rebound at a rate of 8% a year? We just can’t predict that. But we can be sure that your Social Security benefit will grow at that rate for each year you defer beyond the age of full retirement. And it will continue to grow until the age of 70.

Kurinec, for example, advises his clients to build a ramp to retirement by using a year or two of savings, rather than relying on Social Security or investment withdrawals. A savings account balance won’t net investors a ton of gains, but using these funds now instead of dipping them into retirement accounts means those investments will have a better chance of recovery, and you can put your claim on Social Security on hold. Less chance of paper losses turning into realized losses.

“If you have a plan in place, you should be able to weather storms like this,” Kurinec says. “And guess what, this isn’t the last one we’ll face.”

Be realistic about the cost of being a retiree

Retiring with realistic expectations is also key. One of the biggest misconceptions about retirement is that Americans need less money in retirement than they do when they’re working. Wrong, says Kurinec.

Like the Cowles, many Americans want to travel or do all the things they couldn’t do because they worked. Kurinec says the recent retirees he works with typically end up spending 105% to 110% more than they did before they stopped working full-time, and this can last for five to 10 years after retirement.

Similarly, another huge obstacle is the idea that retirees will automatically be in a lower tax bracket. Again, Kurinec says it generally doesn’t happen right away. “If we’re spending more money, that means we’re getting more money, which means we’re probably going to be in an equal, if not a little higher tax bracket,” he says. Not to mention, current US tax rates are likely the lowest many Americans will ever see.

Kurinec says that while she never tells her clients not to do something, like take a big trip when their wallet is down 23%, she stresses the potential consequences and the need to prioritize what’s important. Compromise. Be flexible. These principles will serve people who are retiring in this environment well, he adds. “Everything is fluid. Planning is fluid – things are always changing,” he says.

At the end of the day, however, Kurinec stresses the importance of having a plan. “That doesn’t mean that every single person has to work with a financial planner, but you do need to have some sort of plan in place and make sure that plan is sound,” he says.

Everyone’s definition of retirement will be different, but all of this will cost different amounts of money and it helps to have a good understanding of what you want to do to make it a reality.

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