Should You Get More Conservative With Investments in Retirement?
I hear this question all the time from people approaching retirement.
"Greg, now that I'm retiring, shouldn't I get really conservative with my investments?"
Maybe.
But before we change anything, I want to know why.
Retirement certainly changes the job your money needs to do. You may be transitioning from receiving a paycheck to creating income from the assets you spent decades accumulating.
That can justify changes to your investment strategy.
But becoming conservative simply because you retired is not a strategy.
Should Your Investments Change When You Retire?
For many people, yes.
The difference is that those changes should be driven by a retirement plan rather than your age.
When someone asks me how conservatively they should invest, I want to understand what they need their money to accomplish.
How much retirement income do you need?
How much money do you want available for emergencies?
How comfortable are you with market fluctuations?
How much risk can you financially afford?
How much growth might you need over the next 20 or 30 years?
Those answers begin to tell us what the portfolio should look like.
Why We Use a Three Bucket Approach
One way we approach retirement planning is through what we call a three bucket strategy.
First is liquidity.
I like for people to have adequate money available for emergencies and unexpected expenses. For many of the families we work with, we like to see at least $100,000 in that liquid bucket, depending on their individual circumstances.
I call this sleep well at night money.
Then we look at income.
Once we understand someone's true income needs, we can look at strategies designed to provide dependable retirement income.
If you know your monthly income needs are covered and you have adequate liquid savings, that can change the conversation around the rest of your investments.
Then we can talk about growth.
Do You Still Need Growth After You Retire?
I believe many retirees do.
Retirement could last 20, 25, or 30 years or longer.
During those decades, we still have to think about inflation. We have to consider future taxes. Healthcare expenses could increase. The cost of travel, food, insurance, home repairs, and just about everything else can change.
If you become too conservative too quickly, you could potentially create a different kind of risk.
I have watched people get nervous as retirement approaches, pull their money out of the market, and then never get back in.
Five or ten years go by, and they may have missed significant growth opportunities.
Risk Tolerance Versus Risk Capacity
There are two important pieces of the risk conversation.
The first is your ability to withstand risk. That is your risk tolerance.
Can you emotionally handle seeing your investments fluctuate?
The second is your ability to afford risk. That is your risk capacity.
Those are not necessarily the same thing.
If you have adequate savings and dependable retirement income, you may have greater capacity to accept investment risk with other portions of your portfolio.
That does not mean you should take unnecessary risks.
It means your retirement strategy can be more thoughtful than simply saying, "I'm retired now, so everything needs to be conservative."
Give Every Retirement Dollar a Job
I believe retirement investments should have a purpose.
Some money may need to remain liquid.
Some may need to support income.
Some may be positioned for longer term growth.
The right combination will be different for every family.
Do not make a major investment decision simply because it is what retirees are supposedly expected to do.
Make it because it fits your plan.
If retirement is getting closer and you are wondering whether your current investment strategy still fits what you need your money to accomplish, our team at Legacy Retirement Group can help you take a closer look. Visit LegacyRetirementGroup.com or call us at 614 336 7660.