An analysis of the historical returns of the S&P 500 index from 1926 to 2010 conducted by Prudential Financial shows that the stronger equity markets perform over a prior three-year period, the more likely it is that they will fall in the subsequent year. As a result, according to the study, Americans are more likely to choose to retire at a time when there is more risk that their retirement assets will decline in value just after retiring.
“Market losses in the early years of retirement are much more detrimental to retirement security than losses experienced later in retirement, assuming a retiree has begun to draw upon his or her assets. So this is a significant issue that individuals approaching retirement need to consider,” said Christine Marcks, president of Prudential Retirement. “This risk outlined in the study can be addressed if plan sponsors include a guaranteed income option in their defined contribution plan which protects retirement income from market downturns both before and during retirement."
The study also found that pre-retirees with only defined benefit plans are almost twice as likely to retire in any given year versus those covered only by a defined contribution plan. Furthermore, pre-retirees with a retired spouse are almost two-and-one-half times as likely to retire in any given year as their counterparts with a working spouse.
“The study’s findings highlight the risk individuals take if they retire and haven’t protected their assets or converted retirement savings into guaranteed income during retirement,” said Stephen Pelletier, president of Prudential Annuities. “Americans need to think beyond reaching a retirement savings objective by understanding the risks associated with the timing of their retirement decisions and evaluating ways to secure their savings before they retire.”