Retiring is not necessarily the same as not working

Even before Russia invaded Ukraine, the economy felt pretty dicey. There was inflation, a weird post-pandemic job market, and the prospect of a more hawkish Fed. Now markets are even more volatile as sanctions roil the global economy. For anyone counting down the days until retirement, it has been a harrowing ride.

Plans you made last December to retire this year may not look so opportune now. Your nest egg has taken a big hit if you are invested in the stock markets, with the S&P 500 down almost 9% in the last two months. 

So what should you do? Should you just wait a few more months to see what happens, start looking for a new job or hold on to the one you have a little longer?

The fact is, the future has always been uncertain and always will be. Times like this just make the uncertainty more apparent. We face many unknowns today: The prospect of another Cold War is already sending energy and fuel prices higher, (just look at American gas prices) which means inflation will be a concern for the foreseeable future, and there could be domino impacts for financial markets from the Russian sanctions. 

So if you are leaning toward that wait-and-see strategy, you may be waiting for a long time. We could be in for another new normal.

The financial industry does not often admit it, but retirement is a risk management issue. You need to think about maximising each source of income while protecting it from downside risks - and there are lots of potential downsides these days. 

You can still retire, you just have to be proactive and resilient in the face of a more uncertain world. To be honest, you have no choice.

Odds are you have three different sources of retirement income to manage: your retirement savings, social security and your human capital. Your goal is to balance each of these resources so you can get the most income for the least amount of risk.  

With stock values pared back, conventional advice (like the 4% spending rule) would suggest that you simply need to spend less. But current times illustrate why the conventional wisdom is bad advice. 

How are you supposed to spend less when prices are rising? Austerity is also demanding a lot of seniors who already have missed out on family visits and once in a life-time trips due to the pandemic.

The good news is you have other sources of income.

Retirement Payoff

Americans reap higher social security benefits the longer they postpone payments. And if you already claimed social security you can still change your mind and get higher benefits.

But if you are already retired (or have resolved upon it this year) and the market is down, delaying social security might seem infeasible. After all, you still need to eat. This is where your third source of income comes into play: human capital. 

This is what economists call your 'earning potential' from your labour. When it comes to retirement, we normally assume that human capital is worth zero - after all, you are retired! That is supposed to mean you are done with work.

Being 50 in your father's generation and being 50 now are not the same, as people live longer and higher quality lives, we need to redefine retirement. Retirees can develop a more fluid relationship with the labour market. Retirement going forward may look a lot like the gig-economy phenomenon.