Stock Market Boosting Retirement Account Balances, Experts Warn Retirees to Remain Cautious

Stock Market Boosting Retirement Account Balances, Experts Warn Retirees to Remain Cautious

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  • Exceptional stock market returns have boosted Americans’ retirement account balances.

  • The number of 401(k) millionaires is rising and average account balances are the highest in two years.

  • Sources are warning anyone considering retirement not to be complacent and plan ahead if they want to exploit their winnings.

The stock market boom is creating many 401(k) millionaires.

Thanks to a superb market rally since the start of 2023, the number of people with at least $1 million in their retirement accounts jumped 20% year over year in the fourth quarter of 2023, the average balance of this account reaching the highest level ever recorded. two years, according to Fidelity.

While it may be tempting for optimistic workers to start withdrawing money to fund their post-employment lifestyle, or even start withdrawing that money before retirement, investment experts caution against such considerations, even if the market is breaking records and optimism is high.

Here are some things experts say people need to think about whether the market’s streak of meteoric gains may make them consider retiring or tapping into those funds early.

People are living longer

Brian Spinelli, co-chief investment officer at wealth advisory firm Halbert Hargrove, told Business Insider that early retirement based on market performance is irrational simply because people are living longer these days.

“The number of years that you will have to draw on your own money is now increasing. So if you retire too early, you risk losing track with your portfolio because you live longer than you didn’t think so,” he said.

Early retirees may underestimate the funds needed for their desired lifestyle by overlooking the simple fact that they might live longer than expected, and untaxed 401(k) contributions may require higher withdrawals to cover taxes.

“The biggest risk we see is that most investors, without extensive training, underestimate their longevity, time horizon and opportunity cost, thereby increasing the risk of short-term loss while increasing the risk of elderly poverty,” Aaron Anderson, senior vice president of research at Fisher Investments, told Business Insider in an email.

“If they need $100,000 net, they’re going to have to take $120,000 to $130,000 a year out of their $1 million 401(k) to cover taxes to get that $100,000,” Spinelli said, adding that ‘with a 30 year guarantee. Looking ahead to life expectancy, it is unrealistic to expect consistent annual growth well beyond 12 or 13 percent without an economic slowdown.

Markets are volatile

Investment experts also caution against believing that the market will continue to produce strong returns year after year. Stocks have gained almost 25% in 2023, but this is an outlier and returns stabilize over time with normal ups and downs to reach an average annual gain of around 10% for the benchmark S&P 500 index.

“The average long-term return for stocks is about 10% per year. However, this average is made up of annual returns that vary widely. Markets are up sharply (+20%) or negative in almost two-thirds of the time, while “average” returns (0-20%) only occur about a third of the time,” Anderson wrote.

Future uncertainty often results in a “return risk sequence” that is overlooked by early retirees.

“The difference between an investor who dips into their retirement funds early and one who lets them continue to enjoy the benefits of compound growth can be immense,” Anderson added.

Baby boomers looking to cash in on their gains could also trigger a selloff, potentially dragging the broader market lower. Some supported It’s risky to think that more older Americans are holding stocks because they don’t have the luxury of waiting out a downturn and could panic in a correction, fueling further declines .

Sources highlighted the need for retirees to carry out a “stress test” on their retirement plans, taking into account market corrections, life expectancy, inflation, asset reductions and spending projections.

“Can you get through this long enough for the money to recover without outliving your money? And if the answer is no, maybe that means working longer,” Spinelli said.

Read the original article on Business Insider

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