Financial Planning / Retirement Planning

Should You Reduce Portfolio Risk Near Retirement?

Published by Bob Gustafson

Should You Reduce Portfolio Risk Near Retirement?

If you follow financial industry information, you may have read that it’s best to reduce risk in your portfolio as you near retirement. This is one of the questions many of our clients ask because their research leads them into confusion and perhaps a bit of panic.

“This says I’m supposed to make my portfolio more conservative. But I’m worried that I won’t have enough money when I need it later.”

That’s a very valid concern. And the advice is generally true. But there is another way to reduce risk in your portfolio and still achieve your long-term goals: develop an asset allocation strategy.

How to manage risk and achieve your financial goals

What is financial risk? Risk is any investment uncertainty that can negatively affect your financial outcome.

But risk can be a double-edged sword no matter where you are on your path to retirement.

  • Being too conservative can weaken your money-earning capacity to the point of harm, and
  • Carrying too much risk in aggressive portfolio elements could bite you if the market should come down later.

Is there a magic formula for acceptable risk as you near retirement?

First tame your emotions

We’ve often said that the worst thing you can do is let your emotions get the best of you when you’re configuring your portfolio. Just because retirement is looming larger and more frightening with each passing year doesn’t mean you should pull everything in your portfolio out and stash it in a CD just because it’s ‘safer.’ Anxiety and fear could lead you to make that move thinking it’s best for you.

You’d have less risk of loss, but also less chance for gain.

You need a good balancing act now, taming your emotions as you do so. Retirement, after all, is a nerve-jangling time of transition. Life is about to change dramatically. Your financial decisions as you move toward this big transition will have long-term impact.

Luckily, you may have plenty of experience with life transitions. You likely faced the same seismic life and financial-planning shifts before. When you went to college, graduated, got married, bought a house and had kids all have similar emotional impact. So, whether you realize it or not, you’re a bit of an expert at planning your forward-thinking investment steps. Retirement is just the next big transition, bringing with it some very emotional impacts. Retirement is a big transition. After years of actively earning money at your job, you are now living according to what you’ve saved and what your portfolio provides.

Balance your portfolio

Balancing conservative and more aggressive assets can be a wiser, more profitable, and more secure way to go. (Unless you’re independently wealthy and can be more conservative without worry … but that’s very few of us in the real world.)

Don’t forget these important factors about retirement assets:

  • People are living longer, so their money needs to last longer. If you live to 75 or 80, that’s now on the lower end of life expectancy for many. Your retirement funds may need to deliver for another decade or so.
  • Inflation can significantly impact your retirement assets. We may be in a slow-rising inflation period right now, but there’s no universal rule that says inflation is going to stay that way. No one has any idea what things will cost in the future. You’d better be prepared for $200 grocery shopping tallies, travel that costs 2x as much just to see those grandkids once in a while, and of course the ever-present expense of healthcare and medications (who knows what that will cost decades from now?)

These two factors, and of course others, impact your questions of whether or not you should reduce risk in your portfolio – and by how much!

Get help from a qualified financial advisor

Your financial advisor can help customize your portfolio plans, considering your own personal needs and lifestyle plans, so that you don’t have to go it alone. Even better, a professional financial advisor can help you control your emotions so that you don’t make risky mistakes ironically borne out of wanting to reduce risk.

Simply put, the amount of stocks you need today vs. the amount of stocks needed in the past – i.e. what your parents and grandparents did to manage their retirement funds – needs to be higher. The engine of your portfolio needs to keep revving along, not just rolling slowly and safely, for you to have enough in your golden years. It’s a different world out there, one that will require a bit more risk than you may have expected.

The key, as with all things is balance.

Find out more in our podcast. Contact us with any questions you may have or guidance you may like to receive.