The stock market caused retirement account balances to soar. That’s why experts say retirees still need to err on the side of caution.

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

  • The number of 401(k) millionaires is up, and average account balances are at their highest level in two years.

  • Sources warn anyone considering retirement not to get complacent and to plan ahead if they want to make the most of their earnings.

The soaring stock market has created many 401(k) millionaires.

Thanks to the stunning market rebound since early 2023, the number of people with at least $1 million in retirement accounts grew 20% year over year in the fourth quarter of 2023, and average account balances rose to their highest level since 2023. two years, According to Fidelity.

While bullish workers may be tempted to start withdrawing funds to support their post-retirement lifestyle or even start withdrawing that money before retirement, investment experts warn against such considerations, even as markets break records and optimism runs high.

Experts say people need to consider whether a strong market rally could tempt them to consider retirement or access those funds early.

People are living longer and longer

Brian Spinelli, co-chief investment officer at wealth advisory firm Halbert Hargrove, told Business Insider that retiring early based on market performance doesn’t make sense because now People are living longer and longer.

“The number of years you have to draw on your money is getting longer now. So if you retire too early, your portfolio may be depleted because you live longer than you think,” he said.

People who retire early may underestimate how much money they will need for the lifestyle they want because they ignore the simple fact that they may live longer than they expect and untaxed 401(k) contributions may Higher withdrawal amounts are required to cover taxes.

“The biggest single risk we see is that most uneducated investors underestimate their longevity, time horizon and opportunity cost, increasing the risk of short-term losses while increasing the risk of late-life poverty,” senior said senior Aaron Anderson. Fisher Investments’ vice president of research told Business Insider in an email.

“If they have a net need of $100,000, then they have to withdraw $120,000 to $130,000 a year from a $1 million 401(k) to pay taxes to get that $100,000,” Spinelli said, adding It is unrealistic to expect annual growth rates to continue well above 12% or 13% over a 30-year life expectancy without recession.

Market volatility is high

Investment experts also warn against believing that the market will continue to produce strong returns year after year. Stocks are up nearly 25% in 2023, but that’s an outlier, with returns flattening out over time with normal ups and downs, with the average annual gain being only about the benchmark S&P 500’s gain 10%.

“The long-term average annual return for stocks is about 10%. However, that average return is made up of widely varying annual returns. The market has been significantly higher (+20%) or lower nearly two-thirds of the time, while’ The average ‘return’ (0-20%) occurs only a third of the time,” Anderson wrote.

Uncertainty about the future often brings “a range of return risks” that are overlooked by early retirees.

Anderson added: “The difference between investors who withdraw their retirement funds early and continue to enjoy the benefits of compound growth can be significant.”

Baby boomers’ desire to cash in on gains could also trigger a sell-off, dragging down the broader market. someone argued The growing number of older people holding stocks is risky because they don’t have enough time to wait out the economic downturn and may panic sell stocks, causing the stock market to fall further.

Sources stressed that retirees need to “stress test” their retirement plans, taking into account market adjustments, life expectancy, inflation, asset drawdowns and spending forecasts.

“Can you get through this long enough to recover and still not break your bank? If the answer is no, maybe it requires more work hours,” Spinelli said.

Read the original article business insider

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