Get Ready for the "Great Retirement" of 2022

Last week, I hopped on a Zoom call with a client about a few routine website updates. The client is much older than I am and has been running a successful business for decades. But during our call, they leaned in toward the camera and said, “I haven’t told many people this, but it relates to our discussion. I know we’ve been talking about two options for moving the website forward, but there’s a third. The markets have been exceptional this year, so I may choose to retire next year.”

This confession caught me completely off-guard.

Indeed, the markets have done well in 2021. At the time of writing, the S&P 500 is up 14.44% this year. It has risen 97.79% over the past five years. For comparison, the stock market's average annual gain since 1957 is roughly 8%.

This means the stock market has delivered approximately 2x its expected gains over the past five years; and older, working Americans who have large sums of money invested in retirement accounts are reaping the bulk of those rewards. But given the hush-hush nature of my recent conversation, I have to ask the question…

How many people will retire early in 2022?

If a significant number of people over the age of 55 retire next year without warning, then corporate America is in for (another) massive workforce shake up. The rise of remote work due to COVID 19 has already ushered in what commentators call the “Great Resignation.” The country continues to face labor shortages as individuals remain hesitant to return to work. Supply chains for certain industries are backlogged until summer of 2022.

The “Great Retirement” might be the next tagline to grace the front pages of Forbes and The Wall Street Journal. Retirees, businesses and young working Americans alike would be wise to hedge against volatility and prepare a strategy in case the "Great Retirement" comes true.

How will the economy respond to the “Great Retirement?”

In the face of an uncertain market, many older Americans may decide to get out while the getting's good. Since the economic shutdowns of 2020, economic uncertainty has remained higher than usual. Trading Economics highlights a chart measuring Equity Market-related Economic Uncertainty on their website. I've added the 10-year view below.

As we can see, uncertainty remains high in 2021 compared to the years preceeding 2020. For many older Americans, the mental and financial stress of navigating the workforce might not be worth another year or two of salaried income. Will the economy shut down again? Will a new technology make my business obsolete? It may be easier to take gains and leave those questions for someone else to handle.

However, a sizable exodus from the US workforce will inevitably have consequences.

Wealth Transfer

Millennials are currently the largest working generation in the American economy, but compared to Baby Boomers, they lag behind in key income metrics. For example, Kiplinger reports, "A report by think tank New America found that Millennials earn 20% less than Boomers did at the same age. According to Pew research, the median net worth of Millennial households was just $12,500, compared with $20,700 for households headed by Boomers when they were the same age."

One reason for this disparity is that, up until this point, Baby Boomers have postponed retirement. Time Magazine reports, "As of February 2019, more than 20% of Americans over 65 were working or looking for work, nearly twice the 1985 rate." This massive, older generation has focused on building up their own financial security, which has kept them in high-income positions much longer than expected. Naturally, Millennials have not had the opportunity to hold these same high-income positions.

Reason would suggest, however, that Millennials would be next in line to take over these upper-level positions. If so, we should see generational wealth inequalities begin to correct after the "Great Retirement."

Mid-term volatility in company performance

Statistically, individuals choosing an early retirement will also be giving up management, ownership, and executive positions. This Forbes article notes how, "Data compiled by the Korn Ferry Institute in 2017 found that the average age of a CEO — across all industries — is 58." Adjusting for 2021, these CEOs are now 61 years old on average. If, as I've already noted, the stock market bumps up the minimum retirement age, we may see a massive exodus in the next year or two.

Companies will have to react by adopting transition plans to put new management in place. And according to Adam Robinson, Co-founder and CEO of Hireology, 50% of leadership transitions fail. An increase in failed leadership transitions could have wide-ranging effects for the American economy. First, corporate earnings and profits may fall as company execution sees short-term inefficiencies. Second, companies who have younger leadership and don't experience executive transitions stand to take advantage of opportunities created in these inefficiency vacuums.

Tempered stock gains in 2022-2023

If a large numbers of companies begin faltering due to leadership transitions, the stock market will react to lower than expected quarterly results. But this isn't the only effect a wave of retirements will have on the economy.

If a large number of individual stockholders begin dipping into their 401ks, the stock market may pull back on selling pressure. Moreover, this downward movement wouldn't be matched by previous buy support since new retirees would no longer make salary contributions to their accounts. I’m not saying this would cause a stock market crash. The new influx of retail buyers using mobile apps like Robinhood will continue adding buying volume to the markets and the retirement sell-offs would be slow and gradual. That said, an increase in retirement liquidations would put additional selling pressure on stocks.

Retirees, Beware a shaky market

The 2021 stock market has remained resilient despite numerous red flags and warning signs. Inflation has been rampant. The recent collapse of Chinese property developer Evergrande sent ripples of fear throughout global economies. The fed's increase of bond yields has also shaken stock markets. Pundits continue to warn of a significant market correction.

Retirees may be in for a perfect storm if the market crashes after a majority of retirements finalize. If we see anything close to the 2008 financial crash, recent retirees may attempt to flood back into the job market in order to provide stable income. However, the high-paying jobs they once enjoyed might not be there. Millennials will step up into existing upper management positions and a struggling economy would likely downsize cushy corporate jobs, not expand them.

Common wisdom says to let the retirement account grow even during retirement. However, given the precarious nature of the current market, it may be wise for soon-to-be retirees to hedge against this volatility and uncertainty. I am not a certified financial advisor. But anyone considering retirement should consult with their advisor on how to protect their assets against a stock market downturn. Perhaps higher bond yields can provide risk management. Perhaps liquidating out two years of living expenses upfront would provide enough time for markets to bounce back after a dip. In fact, it takes an average of 4.4 years for markets to return to previous highs after a bear market drop.

While these predictions may not come true, the American workforce has experienced massive disruptions over the last two years. Few things these days can be taken for granted. We may see the "Great Retirement" shake up the economy in 2022, and my advice is to be prepared.