Boomers: How Much Risk Should You Be Taking With Your Retirement Savings?
Written by
Sean Bryant
Edited by
Molly Sullivan
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While some baby boomers have already moved on to retirement, younger boomers are approaching retirement age. If this is your situation, the risk you’re taking with your retirement savings should be front and center on your mind.
Financial advisors and “influencers” on social media often discuss the power of the stock market. And although investing your savings in equities is crucial for your retirement goals, this method doesn’t come without risks.
In this article, we’ll explore how much risk you should take with your retirement savings, including how to alter your portfolio to match your risk tolerance.
What Are Retirement Savings Risks?
One of the biggest risks for your retirement savings is market declines. In 2022, the S&P 500 lost 19.44% of its value. However, in 2023, it rebounded with a 24.23% gain. So, how do these big market swings affect a retiree’s portfolio? Let’s take a look.
Let’s say that 100% of your retirement savings were invested in the stock market, and you started 2022 with a portfolio value of $1,000,000. If you follow the 4% withdrawal rule, you would have taken out $40,000 in 2022.
Then, stock market decline played havoc with your portfolio. First, your portfolio dropped by $194,400 to $805,600. Second, inflation was 8.0%, meaning instead of $40,000, you needed $43,200 to cover your living expenses.
As you may know, 2022 was a bad year for many investors. However, not understanding how much risk you should take made this example look even worse. To cover living expenses, you must withdraw 5.4% of your portfolio, exceeding the 4% rule and increasing your risk of running out of funds later in retirement. Plus, you would have sold assets at low points without giving them the proper time to rebound.
If you had a diversified portfolio and could have allowed your funds to recoup into 2023 without taking distributions, you would still have over $1,000,000. This scenario points out three risks of having undiversified retirement savings: market risk, inflation risk and the risk of outliving your funds.
“While it is true that the amount of investment risk one should take in retirement should typically be less than in their younger years, it is largely dependent on their financial situation,” said Jason Dall’Acqua, CFP®, founder and financial advisor at Crest Wealth Advisors.
Dall’Acqua added, “Individuals who are more financially secure and do not need to withdraw much from their portfolios have the luxury of choosing how much risk they want to take. If preservation of principle is more important, then they can be more conservative in their strategy. If growth for building generation wealth is more important, then they can afford to take more risk knowing that they can whether the increased volatility that comes with taking higher risk.”
How To Lower Risk in Your Retirement Portfolio
Lowering risk in your retirement portfolio safeguards your savings and allows you to continue supporting your lifestyle, even during market downturns. Here are a few strategies to consider.
Invest Outside the Stock Market
Investing all of your funds in the stock market opens the door to the above scenario. Consider diversifying into different assets. Some examples include real estate, cash-value life insurance, annuities, bonds and gold. In addition, using a high-yield savings account to hold one year of expenses can also be beneficial to preserve the value of your investments during market swings.
Diversify Your Portfolio
Diversifying your portfolio is another strategy to lower your risk. Hold a portfolio filled with different investments instead of investing all of your funds in one stock, mutual fund or exchange-traded fund. It’s unlikely that every single investment will decline by the same amount. In addition, consider diversifying your portfolio by sector. The technology industry might be booming while the manufacturing industry is lagging. Having a good mix in your portfolio minimizes your risk of large losses.
“We feel at a bare minimum retirees should have at least five years (and ideally ten) worth of cash flow invested in more conservative investments such as Treasury Bonds and Investment Grade Corporate Bonds along with un-invested cash,” said Jake Falcon CRPC®, CEO at Falcon Wealth Advisors. “This allows retirees to mitigate liquidity risks in equity markets and not have to worry about what the stock market is doing on a daily basis.”
Leverage Less Risky Investments
As you approach retirement, your risk tolerance should decrease. This means your portfolio isn’t invested in high-risk assets like startups. Instead, you might have a mix of stocks, bonds and cash. Having a combination of different assets helps you manage market downturns. For example, when you are in your 20s and 30s, you might have 95% of your funds invested in growth stocks and 5% in bonds. As you approach retirement, this balance might shift to 80% in bonds and cash and only 20% in growth stocks.
Finding the Optimal Balance Between Risk and Reward
Eliminating all market risk from your portfolio opens the door to new challenges, like outliving your savings. Finding the optimal balance between risk and reward is a crucial component of crafting a retirement savings plan that fits your current and future needs.
You must look at your income needs and long-term goals to find the correct balance in your retirement savings. When are you planning on retiring? If you aren’t retiring for a decade or two, you might choose to invest in riskier assets, such as startups and growth stocks. This is because your portfolio has time to recover from market downturns. Unfortunately, since you’re already retired or getting close, you would not want to take on this risk.
Also, look at your income needs. How much income do you need each year to support your lifestyle? What income streams do you currently have? Maybe you decide to move some of your retirement savings into real estate to maximize current cash flow over growth. As your income needs change, your risk tolerance will too.
“There is no one size fits all when it comes to investing in retirement which is why it is important to have a personalized strategy tailored to ones unique financial situation and goals,” Dall’Acqua said.
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