September 21, 2023- In retirement, as during your working years, a well-constructed investment strategy considers risk, cost, and asset allocation. When you retire, your financial landscape changes, and your investments may need to change with it.

How should my investments change with retirement?

Conventional wisdom suggests that your investments should become more conservative as you approach retirement and then very conservative once you retire. The thought behind this is you no longer have the years and employment income to afford the risk of being more aggressive, and in many situations, that is true. However, retirement investments are not one-size-fits-all. What is best for one family is not necessarily right for another, and there are many situations where conventional wisdom should be questioned.

Are stocks too risky for retirement?

When considering investment options in the simplest manner, this usually boils down to stocks versus bonds. Stocks are more volatile but have a higher expected return, while bonds are generally more stable with a lower expected return. Stocks are more aggressive, and bonds are more conservative, historically. They both have a place in almost every portfolio, even nearing or in retirement.

With the volatility in the stock market and high interest rates, it can be tempting to change to an extremely conservative portfolio in retirement and invest in all or mostly bonds. Bonds are a great ballast to a portfolio, and, with higher interest rates, they can provide a good return with lower expected risk. However, there can be long periods of time where bonds significantly underperform compared to stocks. Many people retiring today have a good chance of enjoying retirement for the next 30 years. That is a long-term horizon, and most people would benefit from having a significant portion of their portfolio invested in stocks to capture the higher expected return and the hedge against inflation that stocks offer.

How does risk tolerance factor into retirement investing?

An important part of the financial planning process is determining your risk tolerance. There are several components to this. The first is looking at your total net worth compared to your total spending. If you have a $5 million net worth and spend only $100,000 a year, you can afford to take more risk. Alternatively, if you have a $500,000 net worth and spend $100,000 a year, you can’t afford to take much risk.

The second component of risk tolerance is how much risk you are comfortable with emotionally. Remember that temptation to invest mostly in bonds because of volatility in the stock market? That may come from a feeling of insecurity in your portfolio. If a 40% drop in the stock market gives you heartburn, you may not have the emotional tolerance to take much risk. However, if you didn’t blink an eye when your portfolio dropped during March of 2020, you likely have a high tolerance for risk.

Both of these factors need to be considered when evaluating the risk you can take in retirement. Many baby boomers have accumulated a large net worth that they will likely never spend and plan to pass on to the next generation. If they have a high emotional risk tolerance, they can afford to be much more aggressive, as they are investing for their kids’ inheritance. Your risk tolerance is personal to you, and it is important to align your investments with it for better confidence in your retirement portfolio strategy.

How does my portfolio fit into my financial plan?

Overall, how you should invest in retirement depends on multiple factors, including your time horizon, goals, and risk tolerance. You should consider all of these things when determining a custom investment allocation for your specific needs in retirement rather than defaulting to conventional wisdom.

At Timberchase Financial, we provide thoughtful and comprehensive retirement planning advice. If you would like to start a conversation about how our CERTIFIED FINANCIAL PLANNER™ professionals may be able to help with your retirement plan, please contact us.