An Argument for Retiring in a Bad Economy

NEW YORK ( BankingMyWay) -- U.S. workers are increasingly, maybe even exceedingly, nervous about achieving a stable retirement, and another looming shadow over the economy may give many good reason to stave off retirement for a few years.

Delaying retirement for a few year would provide a twofold advantage to workers:
  • It would buy time to earn more cash for their golden years.
  • It would help avoid retiring into a miserable economy, hopefully with the idea that in a few years things will be back on track and issues such as high consumer prices and a lousy real estate market will heal themselves.

A study from the Washington, D.C.-based Employee Benefit Research Institute supports the idea of delaying retirement from a cash accumulation point of view. The study says Americans are financially better off retiring at age 70 than at age 65 (left unsaid is the fact that workers who push off retirement will have to deal with five more years in the workforce).

But do workers nearing retirement even want to parachute into a lousy economy right now? Not really, if the EBRI study is any indication.

The reality on the ground may be different, according to another report from the University of Missouri.

That study shows American workers may actually be making a mistake in retiring during soaring economies -- not that the U.S. is experiencing one now, or will be anytime soon.

It's all about cycles -- economic ones, that is.

"Potential retirees often will first meet their targeted retirement savings goals during an up market and will be tempted to retire at that point," explains Rui Yao, a finance professor at the university. "The problem with this strategy is that the economy runs in cycles, meaning that after a peak, the market will take a downturn."

Timing economic peaks and valleys is a tall order for professional economists, let alone regular workers, but it's actually better to retire in a down market that is starting to get better, instead of a healthy, vibrant economy headed into a downturn, Yao says.

"People who have retired shortly before an economic downturn run a serious risk of losing a significant portion of their retirement savings, which will shorten the longevity of their retirement income," she adds. "This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives."

Yao's advice?

Don't retire immediately after reaching your retirement goals. Instead, study the financial landscape and aim to retire when the economy is in a downward cycle, "as long as you have saved enough to be comfortable." Once the economy kicks back into growth mode, your retirement savings will exceed your target goals and further cushion you against future downturns.

Certainly, it's a tricky proposition, and aiming your retirement at a moving economy is at first glance a troubling proposition.

But Yao has a point. Delaying retirement in good economic times -- if and when the U.S workforce ever sees those times again -- can add a financial bulwark that can help carry you through those lousy economies that are sure to follow.