How Much Risk Should a Retiree Take?
One of the most common questions I hear from people approaching retirement is, “Should I become more conservative?”
The answer is, “It depends.”
For many retirees, the instinct is to move everything into cash or certificates of deposit (CDs) once the paychecks stop. After all, if you’re no longer earning a salary, it can feel like you can’t afford to lose money in the stock market.
While that concern is understandable, avoiding market risk entirely creates another risk that can be just as damaging: running out of money.
Today’s retirees may spend 40 years in retirement. During that time, inflation steadily reduces purchasing power. A dollar 20 years from now won’t buy what it will today. Investments that don't outpace inflation may feel safe in the short term but can quietly erode a retiree's standard of living over time.
The real question isn't, “How much risk should I take?” It's, “How much risk do I need to take?”
We don’t want clients to take more risk than they need to in retirement, but we can only come up with a risk objective after developing a long-term plan incorporating their spending and financial goals with their entire financial picture including social security, pension, retirement assets and tax implications. Only then can we recommend an allocation.
One strategy we often suggest is separating assets into different “buckets.” Money needed over the next few years can be held in a more conservative portfolio. Funds needed later in retirement can remain invested for growth, giving them time to recover from the inevitable ups and downs of the market. This approach can help retirees avoid selling stocks during market downturns while still allowing part of the portfolio to grow over the long term.
Perhaps the biggest mistake retirees make is allowing emotions to drive investment decisions. Selling after markets fall or chasing investments after they've already surged often does more harm than the market itself.
A well-designed retirement plan isn't built to avoid every bump in the road. It's built to help you reach your destination despite them.
The goal of retirement investing isn't to earn the highest return possible. It's to have enough confidence that your money can support the life you want — for as long as you need it.
Collin Randall, CFA, CFP, is a financial adviser at Randall & Associates Wealth Management, with offices in Butler and Warrendale. Randall & Associates Wealth Management Inc. is a registered investment adviser and does not provide any legal, accounting or tax advice. The opinions expressed here reflect the judgment of the author as of the date of the article and are subject to change without notice.
