How Should Your Definition of Appropriate Risk Change in Retirement?

How Should Your Definition of Appropriate Risk Change in Retirement?

During your peak earning years, you may have determined that a “conservative,” “moderate,” or “aggressive” investment strategy was ideal for you, subsequently building a portfolio around that strategy. Your target may have been funds with the highest potential for growth or reward, hoping that past performance would be indicative of future results (but knowing that is not always the case). There’s nothing wrong with having that sort of mindset, necessarily, but once you retire, your definition of “appropriate risk” may need to shift.

For most retirees, investing should no longer be about finding funds with the highest performance potential; it should be about finding consistent performance. The approach you took earlier in life of investing along a risk continuum (from conservative to aggressive), should adjust to focus now on balancing between maximizing your income and sustaining it for the rest of your life.

While it may seem counterintuitive at first to forego maximizing return potential and seeking steady income, you will be glad you did when you are able to sustain the lifestyle you want decades into retirement… or when the next market downturn occurs. Consider reshaping your portfolio and the investments you choose to fill it to minimize the negative impact that short-term volatility can have on your quality of life.

Take a more balanced approach

It is a generally accepted fact that short-term volatility will happen in the marketplace, but long-term growth potential makes up for that risk. In retirement, you become more concerned with short-term impacts to your finances than you may have once been, but that does not mean you have to give up on stocks and mutual fund investing entirely. You could enjoy a retirement of 30-plus years if you remain healthy, so there is still plenty of time to focus on high-growth investing.

That said, you will most likely want to dial back your aggressive investments so that you can minimize the risk of depleting your assets now that you need to be withdrawing funds. This is especially important, since it can be tempting to take risks once you realize that you now likely hold more cash than you ever did when you were earning a paycheck.

Find reliable returns

So how can you still make the most of your money’s earning potential without worrying about losing it? Consider investments that shift the risk of market uncertainty to another party, such as an insurance company, by putting some of your funds in investment vehicles such as annuities. While the guarantees of an annuity contract depend on the issuing company’s claims-paying ability and there are limitations, fees, and charges for optional benefits to consider, annuities can provide steady income you can rely on as long as premiums are paid.

The details of different annuity options are best explained in a separate post (or better yet, in an in-person meeting at our offices), and there are a few factors to keep in mind around “surrender fees” for withdrawals taken early in an annuity contract period, early withdrawal penalties and taxes. In general, however, we are fans of the sort of safe, reliable income they provide as part of a retirement investing strategy.  They are not the only way to adjust your portfolio to offer more predictable returns in retirement, but they are a good example of the type of investment you might want to adopt as part of your overall strategy at this stage in your life.

There is no single ideal retirement strategy that works for everyone. Ultimately, your best bet is to work with a retirement financial planning professional that can factor all of your specific circumstances into a plan that is tailor-made for you. Interested in finding out what would work best for you? Give us a call for a free consultation.

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