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Investment & Retirement Risk Management
Retirement changes the way you experience risk.
When you're working, you may have time, and a paycheck, to help recover from a market downturn. In retirement, withdrawals may be coming from the same portfolio experiencing those losses.
That's why understanding investment risk and retirement risk becomes increasingly important as retirement approaches.
At Wealth Watch Advisors, we help retirees identify potential risks and build strategies designed around their income needs, goals, and financial circumstances.
Retirement
Risk Management
1. Understand Your Investment Risk
Every investment involves some level of risk.
Stocks may fluctuate. Bonds can be affected by interest rates and credit conditions. Alternative investments may introduce liquidity or other unique risks.
The important question isn’t:
“How do I avoid risk?”
It’s:
“Am I taking the right amount of investment risk in my portfolio to accomplish my retirement goals allowing me to sleep at night?”
2. Prepare for Retirement Risk
Retirement introduces risks that go beyond market performance.
Inflation can reduce purchasing power. Healthcare costs may increase. Taxes can change. And living longer than expected means your money may need to last longer.
A strong financial plan considers these retirement risks before they become financial surprises.
3. Don't Overlook Sequence-of-Returns Risk
A major market decline early in retirement can be especially challenging when you’re simultaneously withdrawing money.
This is known as sequence-of-returns risk. The first 10 years of retirement are the most critical period for sequence of returns risk because market downturns early on force you to sell assets at low prices to fund withdrawals, permanently shrinking the base available for future growth.
Planning your income sources, withdrawals, cash reserves, and investments together may help you prepare for periods of market volatility.
4. Use Portfolio Diversification to manage Risk
Portfolio diversification means spreading investments across different asset classes and strategies rather than depending too heavily on one area.
But owning more investments doesn’t automatically mean you’re diversified.
The goal is to understand what you own, why you own it, and how different investments may behave under changing market conditions.
Here are 4 common strategies that financial professionals use to manage risk:
- Fixed income: If you are worried about losses in the stock market, you could manage the level of long-term investment risk by managing the proportions of diversifying asset classes like stocks and bonds. You could also consider high quality fixed income products, like Treasury bonds or investment-grade corporate bonds, that provide a fixed rate of return. Keep in mind, investing in bonds involves risk, including interest rate risk, inflation risk, credit and default risk, call risk, and liquidity risk.
- Asset allocation: Stocks historically have offered more return but also more risk than bonds. An important way to manage investment risk is to set a mix of stocks, bonds, and short-term investments that is aligned to your investment time frame, financial needs, and comfort with volatility.
- Asset location: You may be able to reduce federal income taxes by holding highly taxed investments like taxable bonds, real estate investment trust funds (REITs), in 401k’s (if your plan offers them), and IRAs, while leaving investments taxed at relatively low capital gains rates in taxable brokerage accounts. Saving on taxes can help your money grow.
- Tax-smart withdrawals in retirement: Knowing what money to withdraw from what account can help you reduce tax liability and help make your savings last longer. If you are already retired, withdrawing first from your taxable accounts, thereby maximizing the ability of remaining investments to seek tax-efficient growth, can be an easily implementable approach.
5. Review Risk as Retirement Changes
Your financial needs at 65 may look very different at 75 or 85.
That’s why risk management shouldn’t be a one-time exercise.
At Wealth Watch Advisors, we continually evaluate investment risk, retirement risk, and portfolio diversification as part of your broader financial strategy.
Because retirement isn’t about avoiding every risk. It’s about being prepared for the risks that could matter most.
FAQ
How can I determine if my portfolio is diversified correctly?
You can determine if your portfolio is diversified correctly by checking your asset allocation, evaluating asset correlations, and avoiding overlapping holdings across your accounts with the help of an advisor.
Do I have enough money in retirement to last my lifetime?
To know if your money will last your life, you need to compare your total savings to your yearly spending using standard rules like the 4% withdrawal guideline.
Will my portfolio and cash flow needs keep up with inflation?
Whether your portfolio and cash flow keep up with inflation depends directly on your asset allocation and your spending habits. With U.S. inflation hovering around 3.4%, holding too much cash or conservative fixed-income assets can slowly erode your purchasing power.
How can I bridge the medicare gap if I retire early?
You can bridge the healthcare gap before Medicare starts at age 65 by choosing from several coverage options, such as public marketplace plans or a spouse’s plan. HSA’s can be very valuable in covering medical expenses as well.
Do I have enough assets or cashflow in retirement to supplement long-term care needs?
You cannot know if you have enough money for long-term care without comparing your total retirement savings and income against the high costs of future medical care. You should only buy LTCI after covering the basics—meaning you are completely out of debt, have a fully funded emergency fund, and are actively building wealth.