Retirement is a big transition both in life and in finances. It’s also a time that you might be confronted with a few common retirement assumptions. When it comes to your investments, it’s common to assume that retirement means moving from “risk on” to “risk off”. But is this always necessary? Does retirement mean you must become a different kind of investor? We don’t think so.
Some still want to be risk takers while others don’t want to take any more risk than is necessary, and there are retirement strategies for both. So, how do we think about investment risk in retirement?
Let’s define risk
First, it is important to define risk. It’s common to think that risk simply means the chance that a drop in the stock market will hit your portfolio. But risk is any threat to the success of your ideal future, so creating your retirement income and wealth strategy is about managing a variety of risks.
- Market risk. Will the next stock market crash mean you have to return to work?
- Spending risk. What if you constantly overshoot your budget or have significant unexpected expenses?
- Inflation risk. Will rising costs eat away at your spending ability?
- Emotional risk. Will you lose sleep watching your nest egg take a market roller coaster ride? If you are married, you and your spouse may have different feelings and concerns about this. If this is you, see 3 Steps to Enthusiastic Win-Win Money Decisions!
With your true risks defined, how much risk can you afford to take? It’s all about your plan.
You need a plan, not just a portfolio
A portfolio can be aggressive, conservative, or anywhere in between, but doesn’t tell you how much risk you should take. Take some time to determine the ultimate goals with your money. You might start with a goal to enjoy life and not run out of money. This will help you find out how much you need to retire. Building a comprehensive financial plan should clearly lay the foundation for how much you need for retirement income and how much “extra” you can dedicate to other goals like giving to family and supporting to causes you care about.
If you’re a risk taker, you might decide to take a more stable, income-focused approach to the bucket that sends your retirement paycheck, which frees you to swing for the fences with the rest, knowing your retirement security isn’t at risk. On the other hand, if you’re a risk avoider, this helps see how much risk is necessary to meet your goal and how to avoid the rest.
Decide how you’ll create a stable retirement income
The “Golden Goose” or “Buckets” approaches in Understanding Retirement Income can help you determine strategic risk for your portfolio. If you have enough in your safety and income buckets to meet your needs, allocating money to growth bucket can lead to greater resources available for family and charity. I have a friend whose 96-year-old mother was 100% invested in stocks and adopted more of the “Golden Goose” approach. She loved the ride of the stock market and made sure her stock portfolio could meet her income needs through dividends, and she wanted to leave more money to charity and family. So, though she’s not your average risky investor, she was able to create a stable paycheck to enjoy her life while trying to grow more in the long run.
Past results don’t equal future guarantees
Be careful not to bring your past successes in risk taking into your retirement portfolio design. I also know a sad story of a person who leveraged their investment portfolio, even though they already had enough resources to meet their lifestyle and giving goals. Their stock portfolio was highly concentrated and when the tech bubble burst, they lost most of their money. You can be a reasonable risk taker without sacrificing your retirement security, it just requires the right plan.
This is not “one and done”
Revisiting your plan regularly is important. This is not a “one and done” decision, it is not etched in stone. You should review your plan every year and it should be flexible, able to change as your needs and preferences evolve. You might think you’re the same risk taker in retirement but decide otherwise when the first big post-retirement market downturn hits.
You can be retired and still be a risk taker!
Being retired doesn’t mean abandoning what you like about investing, whether that’s taking smart risk or avoiding any unnecessary risk. But your strategies (and you) should adapt to your changing needs. Reasonable risk is just fine, but you don’t want to put your retirement paycheck in jeopardy. Use your advising team to work out these topics. Money is often emotional, and we can help you sort through your views. Also, finding a person, couple, or family, who is a step or two further down the road can help. Ask how they have worked through this practically and what advice they would offer. You might avoid a few potholes they stepped in along the way!
Craig Hamilton
Strategic Advisor
About the Author
With over 30 years of experience as a Certified Financial Planner, Craig Hamilton joins Alterra as a sort of paternal figure and has a position of respected “special counsel” to the firm. This role is likely familiar to Craig as one of his four children is also a financial advisor. Mr. Hamilton is also a Certified Public Accountant with a degree in Business from Pacific Lutheran University in Tacoma, where he graduated magna cum laude.
Craig was born and raised in the Pacific NW and built a family here that now includes seven grandchildren. In Craig’s words, “coaching, counseling, and mentoring are in my DNA.” This approach also characterized Craig’s financial career for 20-plus years as an Investment Officer for Russell Investment Services and their later incarnation as The Threshold Group. Throughout that time, Craig approached financial planning as “a critical tool to manage financial priorities and achieve a client’s dreams,” a philosophy perfectly aligned with the Alterra approach.
Craig took an early interest in all things financial — purchasing his first security while still in elementary school. Given his history, it’s not surprising multi-generation investing and legacy planning are his special interest. Listening to the stories of his clients and then helping them along the path to their goals brings Craig personal joy. So, it will likely come as no surprise that Craig was also a college tennis coach for over 20 years. To repeat Craig’s catchphrase, “coaching, counseling, and mentoring are assets” that he will invest in Alterra Advisors.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.