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An advisor's thoughts on early retirement

Advice on the challenges of investing and retiring early during a volatile market
2.5 minute read
November 29, 2022
Planning for retirement
Early retirement
Market volatility
Managing portfolios

Most investors dislike and even fear economic and market declines. And it's no wonder—downturns can be scary, but they should be expected. 

Michael Kohler joined Vanguard in 2008 during the great financial crisis and saw firsthand the struggle many were facing. That experience, along with his passion for investing and helping others, led him to become a Certified Financial Planner™ professional and financial advisor.

Since that time, markets have gone up and down, and once again investors are concerned about what the future may hold. For some, the market was an intimidating place after the 2008 downturn. But since, some just started warming up to the market and are investing for the first time. Others may be further along in their investment journeys, aiming toward an early retirement and hoping their nest egg is secure. Wherever you stand in your journey, your eyes are likely on the potential volatile markets ahead. 

Downturns have happened before and will happen again.

—Michael Kohler, CFP®

When you realize that downturns and recessions are part of a normal market cycle, you should anticipate them. Instead of feeling distressed, plan for market downturns. The cause of the market decline doesn't matter. So, prep for some downs alongside your ups in the journey.

Michael Kohler shares below some of his experience as a financial advisor within the market roller coaster.

What are some common mistakes you've seen during a volatile market?

There are many pitfalls that lead investors to make costly mistakes. One common scenario is making a financial decision based on emotion. It's human nature for our emotions to be stronger when our money's on the table. However, prudent financial decisions shouldn't be based on emotion. Instead, I like to think of my clients' portfolios as a business. We need to plan how we're going to make money and what risks we may encounter along the way. And when things get tough, we don’t just throw in the towel and close the business.  

Do you know investors who lost money by trying to avoid a market downturn?

Although I advised against it, one of my clients sold everything to cash in mid-March 2020 during the COVID-19 crash. A few months later, the stock market came roaring back. If this investor had stuck to the financial plan and not allowed emotions to control their financial decisions, their portfolio would have recovered the losses and increased the balance by several hundred thousand dollars as a result of rebalancing back to the advised target asset mix.

If the market heads into a recession, how might an investor pivot?

A recession doesn't need to change your risk tolerance or investing approach. You should continue to invest regularly and try to increase the amount you're saving. Your overall portfolio asset mix should determine the percentage of your money invested in stocks, bonds, and short-term reserves. It's important to review your asset mix periodically. If your portfolio percentages are off target by more than 5%, it may be appropriate to rebalance. In the current rising interest rate environment, it's important to remember that each part of your portfolio serves a specific purpose. Stocks provide growth and offer a decent inflation hedge over the long term, such as over 10 years. Bonds provide an income stream and tend to decline less than stocks, part of the diversification benefit. Cash should be held in a measured way, not to exceed the target level of your emergency fund or short-term spending goals (e.g., roof, car, house, or other expenses in the next 2 years).

As a reminder, your bond investments will start to pay higher dividends each month, which is the source of most of your bond returns. I like to compare bonds to rental properties. Until you're planning to sell the rental property, its value doesn't matter. You just need to own the rental (or bond) and collect the rent check each month. And, by the way, the rental income will continue to increase over the next few years because of the higher interest rates.

When storm clouds are looming, you know it can't rain forever. Likewise, the market has a way of moving out of its trends, whether it's trending up or down. Learn more about why volatility and downturns are a part of investing

Never trust a trend. I don't trust the market to continue to do what it's doing.

—Michael Kohler, CFP®

If you’re preparing for an early retirement, here are 8 things to consider:

1. Check your retirement timeline. Early retirement isn't for everyone. Remember the 2 financial benefits you gain each year you delay retiring: 1 more year of saving into your retirement accounts and 1 less year of withdrawing from your savings. Decide what's best for you, your current situation, and your future goals.

2. Determine what retirement will look like. How do you plan to spend your time, energy, and money in the first few years of retirement? Know where this money sits today and the potential tax implications of accessing these funds.

3. Pay off big ticket items. Any car purchases, home renovations, or children's college expenses are best settled before you retire.

4. Keep saving regularly. Try to increase your savings amounts, if possible—even small amounts add up over time.

5. Secure cash for 1 to 2 years of expenses. This allows you to spend less from your portfolio in the first few years of retirement, which will give your investments additional time to recover.

6. Don't be discouraged by downturns. Look at downturns as opportunities to put your hard-earned cash to work at more attractive prices.

7. Have an accurate spending budget in mind. A realistic budget is important. Make sure you've factored in inflation over several decades to determine whether your savings can support your expected yearly withdrawals.

  • Analyze your portfolio with a retirement income calculator. If the analysis doesn't comfortably support your retirement spending during your anticipated years of retirement, you may want to reconsider when you retire.
  • Your nest egg balance will go up and down with market fluctuations. If you're concerned about the recent decline in your portfolio balance, you could delay retirement to attain a more comfortable spending level throughout your retirement. On the other hand, you could focus on the amount of money you'll need each month and year. The reality is you don't need your entire portfolio balance on any single day. You only need bits and pieces of it over time. 

8. Consider health care and Social Security.  Early retirement (before age 65) could require budgeting more for health-related expenses. You might need more time to build up your nest egg or need to keep your employer health insurance coverage a while longer. It's also important to consider how many years your savings will have to fully support your spending until you file for Social Security. Generally, it's best to delay Social Security as long as possible; however, it's important to consider your health and family's longevity when making this decision.

Nobody can predict how long a market downturn will last. Some recoveries are fast—like the second half of 2020. Others are longer—like the years following the 2008 crash. Along the way, it's important to maintain a balanced and diversified portfolio to ensure that when the market does come back, your portfolio appreciates with it. Review your asset mix periodically and rebalance back to your target if needed. Rebalancing during a market downturn can help your portfolio recover its losses more quickly. Although it may require some time and patience, your portfolio should start to grow again, and you'll be on track to meet your goals.

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All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.