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Timing of Retirement Crucial, Says Finance Survey

People who retire at the wrong time can end up creating financial hardships as

People who retire at the wrong time can end up creating financial hardships as a result, according to the findings of a research study that utilized data contained in a biannual finance survey.

In the study,

People who retire at the wrong time can end up creating financial hardships as a result, according to the findings of a research study that utilized data contained in a biannual finance survey.

In the study, Rui Yao, an assistant professor of personal financial planning in the College of Human Environmental Sciences at University of Missouri, found that a large number of people choose to go into retirement when the asset markets are at their highest point in the business cycle, which can present them with significant challenges in the long term.

The research study was paid for by a grant from the Prudential Insurance Company of America, and appeared in the Journal of Personal Finance. Yao culled data from the Health and Retirement Study, which is conducted by the University of Michigan on a biannual basis. The study investigated the financial states of more than 4,000 households.

Individuals in this situation often save the money they need to stop working while the asset markets are up and may experience a strong temptation to stop working and live off their savings, according to BusinessNewsDaily. These individuals are not taking the cyclical nature of securities into consideration.

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

She added that "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. This could result in many retirees outliving their retirement savings and facing financial hardships toward the end of their lives."

The academic suggests that if people planning for their retirement hit their savings goals, they should hold off briefly before they stop working. He said that this advice is particularly pertinent during the boom phases of an economy.

She recommends instead that people retire when asset markets are low, so that way their portfolios will increase in value about their initial target amounts. This appreciation will help to ensure that these people have enough to create a financial cushion that is adequate for covering future economic downturns. 

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