As retirement approaches, the strategies that served you well during your working years may need to shift to reflect your new financial priorities. While growth-focused investments like stocks might have been ideal for building your nest egg, the closer you get to or enter retirement, the more important it becomes to protect what you’ve accumulated. Moving some of your investments into safer, low-risk options can be a crucial step in ensuring financial security throughout your retirement years. When you transition to paying yourself, instead of an employer paying you, you may want to make sure the funds are better protected.
The Importance of Capital Preservation
One of the primary reasons retirees should consider shifting to lower-risk investments is the need for capital preservation. During retirement, your ability to recover from significant market downturns diminishes because you’re no longer contributing to your investment accounts through a regular salary. If a large portion of your portfolio is exposed to high-risk assets, a market downturn could significantly reduce the value of your investments, potentially affecting your ability to meet essential expenses.
According to a study by the Employee Benefit Research Institute (EBRI), nearly 40% of retirees have experienced a major financial shock, such as a significant drop in their investment portfolio, which forced them to adjust their spending habits. By reallocating a portion of your assets to safer options, you can help protect your savings from such shocks, ensuring you have enough funds to cover your retirement needs. Keep in mind, for many once they have made it to retirement, it may be more important to stay retired with the lifestyle they desire, rather than shoot for large gains from investments.
Managing Sequence of Returns Risk
Another critical factor to consider is the sequence of returns risk. This refers to the order in which your investment returns occur over time. For retirees, the timing of withdrawals from your investment accounts can significantly impact how long your retirement can last. A poor sequence of returns—where negative returns occur early in retirement—can deplete your savings faster than anticipated, even if average returns are strong over the long term.
Moving a portion of your portfolio into safer, low-risk investments, might help mitigate this risk. Look for assets that typically offer more stability and less volatility than stocks, to provide a buffer against market fluctuations. By reducing exposure to high-risk assets, you can create a more predictable income stream that is less dependent on market performance, helping to better ensure that your savings last throughout your retirement.
Generating Predictable Income
In retirement, it is often difficult to shift focus from growing your wealth to generating a steady and reliable income stream. Low-risk investments can play a crucial role in this transition. For example, fixed-income investments, such as certain insurance or annuities, offer predictable payments that can supplement other sources of income like Social Security or pensions.
Annuities, in particular, may be an attractive option for retirees seeking guaranteed income. These financial products can provide a fixed monthly payment for life, ensuring you won’t outlive your savings. While they may not offer the high returns of stocks, their stability, and predictability make them a component to consider for a well-rounded retirement portfolio.
The Role of Diversification
Diversification is another strategy for managing risk in retirement. By spreading your investments across a range of asset classes, you can reduce the impact of any single investment’s poor performance on your overall portfolio. This is particularly important for retirees who need to balance the potential for growth with the need for stability.
A well-diversified retirement portfolio might include a mix of stocks, bonds, and cash equivalents, along with other low-risk investments like certificates of deposit (CDs), insurance, or annuities. The goal is to create a balanced portfolio that provides both security and the potential for modest growth, ensuring that your savings are protected while still generating enough income to support your retirement lifestyle.
It’s not just your investment risk that needs diversification, you should also be attentive to the taxes on those investments. Having tax-deferred investments mixed with those that are tax-free may allow you to structure your income plan to allow more of your withdrawals to make it into your pocket. Far too often the tax one needs to pay to withdraw is not factored in correctly and one ends up with then than one was planning.
Working with a Tax-focused Retirement Advisor
Navigating the transition to retirement and adjusting your investment strategy can be complex. A financial advisor, especially one focused on tax-efficient retirement planning, may help you assess your risk tolerance, income needs, and overall financial goals. They often work with you to develop a tailored investment strategy that prioritizes capital preservation while still allowing for some growth potential.
They may also help you understand the tax implications of reallocating your assets and guide you in making tax-efficient decisions that maximize your after-tax returns. By taking a comprehensive approach to retirement planning, you can better ensure that your investment strategy aligns with your long-term financial goals and provides the security you need to enjoy your retirement years.
Conclusion
As you enter retirement, protecting your hard-earned savings becomes a top priority. While growth-focused investments may have been suitable during your working years, shifting a portion of your portfolio into safer, low-risk options may help better safeguard your financial future. By focusing on capital preservation, managing the sequence of returns risk, and generating predictable tax-efficient income, you can create a retirement portfolio that provides both security and peace of mind. With the guidance of a knowledgeable tax-focused financial advisor, such as Christopher J Dixon or Samuel Dixon, co-founders of Oxford Advisory Group, you can better navigate these decisions confidently, ensuring that your savings last throughout your retirement.
Oxford Wealth Group, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information about Oxford can be found by visiting the SEC site www.adviserinfo.sec.gov. and searching by our firm name. We are a financial services firm that utilizes insurance and investment products. Insurance products and services are offered and sold through Oxford Advisory Group. Oxford Wealth Group, LLC and Oxford Advisory Group are affiliated but separate entities.
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- Schroders. “Global Investor Study 2024: Retirement Planning and Investor
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