Life is full of contradictions, compromises, adjustments, and balancing acts. Retirement is no different.
Building a retirement plan that encapsulates your goals and values as well as stands the test of time is a challenging task, one that generally can’t be done without a little bit of risk.
Risk in retirement is like a catch-22—you need it to sustain your nest egg but too much can hurt your future plans. How can you balance risk in retirement? Here are a few ideas.
Risk comes in all shapes and sizes
Risk in retirement isn’t as predictable as flowers in springtime. Risk isn’t necessarily cyclical and it can impact different people in various ways. There are several types of risk you should account for in your retirement plan:
- Investments
- Health
- Personal
Today, we’re going to dive into these different risk profiles and include critical elements for your consideration along the way.
Risk and Investing
Your investing journey doesn’t stop the moment you retire—in fact, it’s quite the opposite. It’s often best to craft an investment plan that supports your retirement goals (lifestyle, healthcare, estate, etc.), which could bring about some important changes to your risk profile, asset allocations, and overall investment strategy.
At TFS, we are passionate about helping retirees continue to invest in intentional and meaningful ways to enliven their retirement plan. In the retirement planning space, much talk centers around building up your nest egg but not enough dives into using and preserving it.
Let’s take a closer look at how your investing practices may shift in retirement.
Discover new risk tolerance and capacity
Creating a portfolio that targets the appropriate risk levels for your situation is critical.
- Risk tolerance refers to your comfort level with volatility in your portfolio.
- Risk capacity is the amount of risk you can or need to take on to pursue your goals.
Each plays an important role in retirement. Your risk tolerance and capacity will grow and evolve over time depending on your present needs and future goals.
For many, retirement marks a time of more moderate risk tolerance. Since you need the money for income, you might not assume the same risk you would earlier on in your career. Now, this doesn’t mean that risk is absent from your portfolio, rather than it’s present in an intentional way that matches your time horizon and goals.
The same idea applies to risk capacity. You might not need to take on the same risk levels to pursue your goals. Discovering the right balance for you is essential and can be done by working with a financial professional.
Build a diversified portfolio
In retirement, investing is still investing, so much of the same best-practice guidelines still apply like diversification. Crafting a diversified portfolio helps balance risk in the long run.
Diversification seeks to balance market exposure by investing in securities that react differently to market conditions. This could mean anything from investing across various asset classes, market sectors, and locations. Your specific allocations should reflect your risk, time horizon, and goals.
Outpace inflation
Inflation is retirement planning’s kryptonite. It’s important to be aggressive enough to outpace inflation but not so aggressive that you endanger your savings or assume risk levels far outside your desired zone. As we build your retirement strategy together, we’re cognizant of this challenge and help you structure your finances to keep your money working for you longer.
Consider healthcare costs
Over the last couple of years, healthcare has outpaced inflation by nearly double and that projection is only set to increase. Healthcare is one of the largest spending sectors in retirement—accounting for nearly 15% of your annual budget. It’s also estimated that a healthy couple will spend about $295,000 on medical costs in retirement excluding long-term care (which about 70% of people over 65 will require).
These figures highlight the importance of amassing a sound amount of money to cover health-related expenses. Saving enough to cover health care requires a unique combination of investments and insurance, both of which we can help you plan for.
Create a risk management plan
Risk doesn’t just present itself in investing. It’s also essential to create a risk management plan with the proper insurance coverage for your needs. In retirement, you’ll likely require different insurance needs than when you were younger.
Insurance coverage for retirees
While everyone’s insurance needs will be different, here are some types of coverage to consider.
- Healthcare
- Retirees need healthcare coverage and most will turn to Medicare. Medicare is a complex system, but we’ve partnered with insurance professionals to help you find the right blend of coverage for your health and personal needs. Check out our Medicare blog series to learn more.
- Long-term care insurance
- Long-term care insurance is a policy designed to help cover the cost of care should you require assistance with activities of daily living. These policies can be costly and they aren’t right for everyone but if you’re considering one, start the conversation in your mid-50s.
- Life insurance
- The most evident benefit of life insurance is protecting a loved one in the event of your passing. Should someone depend on your income, it’s often a good policy to keep around. Some retirees also use life insurance benefits as part of their estate planning. You can also use life insurance hybrids for covering long-term care needs.
There are several other types of insurance policies that might be required/best for you like homeowners/renters, travel, personal liability, etc. We can conduct an insurance review to take a look at your current policies to see how they are serving you. You might find that some aren’t as useful as you thought and others could truly benefit your plans.
Preserve assets with cash reserve
Investing in retirement is critical but establishing a hardy cash reserve is another important piece of the puzzle. Cash is another great way to balance risk. A healthy cash reserve can be incredibly useful for a rainy day or just for added confidence in your retirement plan.
The right amount of cash in your portfolio is like a “shock absorber” for your retirement plan. Your car, for example, is much more predictable with shock absorbers, helping you make the ride more reliable and comfortable. That doesn’t mean there won’t be bumps in the road, just that you’re prepared to handle them. Shock absorbers for your portfolio and retirement plan operate in the same way. We’d love to talk with you more about how this concept can be applied to your investments.
Retirees need an emergency fund
Emergency funds are a tried and true component of your retirement plan—like milk and cookies, you can’t really have one without the other. Many retirees benefit from saving anywhere from 3-6 months of living expenses. Your emergency fund could come in handy in a market downturn, if you have unexpected medical expenses, cover immediate long-term care needs, emergency travel, and more.
What about debts?
In an ideal world, you would retire without any debt. But that vision just isn’t the reality for most retirees. You might still have your mortgage or take on a new mortgage in a snowbird location or perhaps you’re still paying off a car or medical bills from a recent surgery.
While creating a debt repayment plan is critical, it’s also important to balance debt repayment and maintain a cash reserve. A healthy amount of cash can bring more freedom to your retirement income plan. Should something unexpected arise, you would have the cash-on-hand to tackle it, instead of putting expenses on a credit card, getting a loan, or borrowing from friends or family.
As with everything we’ve discussed in this post, it’s all a balancing act. You can actively pay down debt without clearing out your bank account to get there.
Risk is present but it isn’t permanent
Risk is a fluctuating factor in retirement, making it difficult to account for at all times. That’s where a strong plan shines through. It’s important to preserve the nest egg you spent 40+ years building.
Creating a plan that takes into account how risk impacts your investments, health, and day-to-day finances can bring more confidence and hope for the future. Similar to “shock absorbers” for your portfolio, your plan itself can act like guardrails for your life, guiding you through market swings, daily news, and other twists and turns you experience every day.
Risk, like nearly every other financial element, can be personal. We’re here to help you navigate these waters and build a retirement plan with your goals and values at the center. If you’re ready to make a plan to balance risk in retirement, set up a time to talk with us today.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.
Investing involves risk including the potential loss of principal. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, information presented here should only be relied upon when coordinated with individual professional advice.
