You’re just about ready to retire, and you feel like your investments are out of balance with your financial goals. One of the key things you need to look at when you retire is your tolerance for risk. What served you well when you were younger may not be exactly what you want when you’re this age. For most people, the closer you are to retirement, the more your risk tolerance shifts. But how do you evaluate it? Let’s look at an evaluation of risk tolerance so you can ensure that your investments match your changing needs.
What Is Risk Tolerance?
Risk tolerance essentially represents the ability and willingness to accept investment risks. You likely had no problem accepting large risk exposures when you were in your 30s or 40s and significantly hoping to achieve good returns from your portfolio. Now that retirement is near, on the other hand, the stakes are higher, and the question then becomes, how much risk do you feel you are still comfortable with?
Your ability and willingness relate to whether you feel comfortable taking risks emotionally and whether you have sufficient funds to absorb a loss. As you head into retirement, you will likely need to reassess both of these factors to align with new priorities.
Assessing Your Willingness to Take Risks
Often, personality is related to risk tolerance. Do you lose sleep when the market shifts? Chances are that your risk tolerance might be lower than that of someone who doesn’t care about market drops because they can ride out declines without concern. So, the willingness you have had for decades may not match the financial realities of retirement, especially as your goals become so much more immediate and specific.
You should ask yourself some key questions:
1. How do I feel about the possibility of short-term market losses as I approach retirement?
2. Am I still comfortable with market volatility, or has my anxiety about investment losses increased?
Your answers will help you determine how much risk you can emotionally tolerate in the next
several years.
Understanding Your Financial Ability to Take Risks
On one hand, you’ve got your willingness to take risks; on the other, your cash ability shifts naturally with time. You may well have been quite capable of tolerating more aggressive risks while you were young and far from retirement since you didn’t expect to draw upon your accumulated retirement savings anytime soon. Now that retirement is near, perhaps you will not be able to endure large swings in your portfolio.
Factors affecting this risk-taking capacity include the following:
1. How long you have before retirement: If you are within five years of retirement, your ability to take risks has diminished because you don’t have enough time to ride out the storms.
2. Liquidity needs: If you have liquidity for hospital bills or living expenses, you will want to protect more of your wealth with safer investments.
3. Importance of your retirement goal: The closer you are to using your retirement savings for living, the less you can afford to gamble with your portfolio. At this point, high-risk investments could jeopardize your financial security.
Finding the Right Balance Between Risk and Security
As you revisit your risk tolerance, it is going to be important to walk that line between growth and preservation. A totally risk-free strategy in which you withdraw from stocks and high-yield investments may seem prudent, but it could leave you vulnerable to inflation risk. Holding a portfolio full of volatile investments can also threaten your retirement funds in a market downturn.
For instance, a moderately conservative portfolio works for most people who are close to retirement. Most likely, the portfolio will be made up of growth stocks and stability bonds so as to have some headroom for returns while protecting from significant losses.
Regularly Revisit Your Risk Tolerance
Your risk tolerance isn’t static, and it shouldn’t be. Even when you’re closer to retirement or have retired, your risk tolerance assessment should continue. Changes in your healthcare needs, lifestyle, or even fortunes that fall unexpectedly might modify your perception of risk tolerance.
Habitually analyze your portfolio and the level of risk at least once a year or every time that you undergo significant life changes.
You might consult financial advice to ensure that your portfolio remains on track, reflecting the present and your current financial situation and goals. You might attempt to hold on to whatever had previously worked for you, but that could mean reassessing what has become your comfort level in terms of risk and placing you on firmer ground for a more stable and comfortable retirement.
Conclusion
As you approach retirement, assessing your risk tolerance is vital for making informed decisions about your investments. By understanding both your willingness and ability to take risks, you can adjust your portfolio to match your financial goals and personal comfort level. Remember, the investment strategy that served you in the past might not be the best one for your future.
At
Plush Retirement, we specialize in helping individuals make sound financial decisions as they near retirement, so they can actually enjoy their retirement without concerns of running out of money or volatility in the markets. Explore how we can assist you with eliminating all risk and anxiety with your financial future.
