Rethinking investment risk in retirement: Why too much caution could cost you
When we speak with clients approaching or in retirement, one of the most common themes we hear is a fear of running out of money. It’s a deeply emotional concern, and understandably so. No one wants to outlive their savings or see their lifestyle compromised in later life.
Yet too often, this fear leads to an overcorrection: investment portfolios skewed too heavily toward “low-risk” investments like bonds. While caution has its place, being too defensively positioned can be just as risky as being overly aggressive. Why? Because the real enemy for many retirees isn’t short-term market volatility. It’s the risk of not having enough money to maintain their desired lifestyle for the rest of their life. A too-cautious portfolio may not generate the growth needed to fund all their future needs.
And there’s another quiet threat: inflation. Even modest inflation gradually erodes the purchasing power of your money. Over a 20- or 30-year retirement, this effect can be dramatic. A portfolio overly weighted to low-growth investments such as bonds, may not grow enough to keep up with rising costs, putting future spending power and lifestyle at risk.
Understanding the mix: equities vs. bonds
At a high level, investments can be grouped into two broad categories or “asset classes”. Equities (often called stocks) represent shares in companies and typically offer higher potential returns over time, though they can fluctuate in value substantially at times. Bonds are essentially loans to governments or companies, and usually provide lower but more stable returns.
Finding the right balance between these two is key. Equities can drive long-term growth, while bonds add a level of stability to help manage short-term needs and equity market dips. Your ideal mix depends on your individual goals, investment timeframe, and comfort with fluctuations.
We often recommend that any large, known expenses you expect to make in the next 3-5 years (such as an around-the-world cruise or a new car) should be held in cash. This protects those funds from market drops and ensures the money is ready when you need it.
The cost of being too cautious
Consider this: A 65-year-old retiring today could easily have a 30+ year investment timeframe. Many people forget that retirement isn’t an endpoint. It’s a new phase of life that can span decades. Reducing equity exposure too drastically at retirement could mean missing out on the very growth needed to support that future.
Let’s imagine this retiree decides to allocate 25% of their portfolio to short-term bonds. That’s enough to fund five years of retirement income should a market downturn occur. Short-term bonds are generally less volatile than equities and are unlikely to fall significantly in value during the kind of market conditions that typically trigger sharp equity declines. This bond allocation acts as a buffer, protecting income during turbulent times and allowing the equity portion of the portfolio time to recover. Historically, most bear markets have recovered within 3 years. The remaining 75% is invested in equities for long-term growth. This blend provides both the peace of mind to ride out short-term shocks and the potential for higher returns over time.
Contrast that with a portfolio holding, for example, only 40% in equities over a 10+ year horizon. Historical data suggests that such a cautious allocation is likely to deliver significantly lower returns. This increases the risk that a retiree either has to spend less in retirement or draws down their money too quickly leading to a potentially lower standard of living in later life.
Younger investors: risk of playing it too safe
For younger investors—those in their 20s, 30s, or 40s—the equation changes again. With retirement decades away, an equity allocation below 100% often doesn’t make sense. The lower the allocation to equities, the more they may need to save before retirement, work longer, or accept a lower standard of living in later life.
It’s not just about risk, it’s about you
At Pentins Financial Planners, we believe the best investment strategy is one that’s built around your life, not generic formulas. We don’t rely on one-size-fits-all approach. Instead, we take the time to understand what matters to you.
We use something called cashflow planning. This is a way of mapping your financial future: projecting your income, expenses, savings and investments to see what kind of investment returns you’ll ‘need’ to live the life you want. Based on this, we help you design an investment plan that reflects your real goals and risk comfort.
Sometimes that might mean taking less risk, because you’ve already saved enough. Other times, it might mean aiming for more growth to make sure you don’t run short later.
The bottom line
Your comfort with investment risk can evolve over time. It changes with your age, market conditions, and life events. But one thing is always true: making decisions based on fear during market downturns usually leads to poor outcomes.
Instead, by thinking in terms of short-term needs and long-term goals, and setting your investments up accordingly, you’ll be more likely to stay on course. Because ultimately, it’s not about avoiding risk. It’s about managing it in a way that helps you live well and sleep soundly.
Past performance is not a reliable indicator of future performance. The value of investments can go down as well as up, and you may not get back the amount you originally invested
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