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The Most Overlooked Risk in Retirement Investing?

How much risk do you need to reach your goals?
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One of the biggest challenges in retirement investing is getting risk right. Most people focus primarily on their risk tolerance, meaning their comfort level or ability to withstand volatile markets and even bear market conditions. They often overlook another equally important risk: “required risk”, meaning the risk they need to take if they hope to reach their goals.

Balancing these risks is a critical part of retirement investing, but it can be hard to do. You may find that there’s a disconnect between your risk tolerance and your risk needs, and that can lead you to make some tough but vital changes to your retirement accounts. That’s what one investor discovered when we talked with him about his retirement plans.

Your risk tolerance & required risk may not be the same

John, like many investors, had been burned in past bear markets. After sharp losses in the 2002 technology bust, he’d steered clear of stocks. He’d consistently contributed to his retirement accounts over the years, but his assets were entirely in cash. This was in line with his low risk tolerance, but it turned out that it wasn’t compatible with his retirement goals.

If you avoid taking risk now, you might face another risk, like running out of money, later.

John was looking to retire in the next few years, and he wanted to keep his same quality of life. He didn’t want to try to get by on less money or relocate to an area of the country where his money might last longer.

A little risk can go to a long way

If he kept his accounts in cash, he probably wouldn’t be able to maintain this standard of living throughout his retirement years. In fact, he’d risk running out of money.

He’d have a much better chance of having the life he wanted in retirement if he was willing to take a little more risk and invest his retirement assets more productively. And since he’d saved aggressively for retirement over the years, he didn’t have to take a lot of risk. If he shifted from cash to bonds, he’d be much more likely to afford a long and comfortable life in retirement.

Many investors don’t have that luxury, however. The well-respected Trinity study (click here to read more) found that investors needed to have 50% invested in stocks in order to withdraw 4% a year from their accounts (adjusted for inflation) over 30 years without running out of money.

Tough choices: Should you take risk now or later?

Taking more risk isn’t easy, and it wasn’t easy for John. He was still worried about the possibility of losing the money that he’d worked so hard for, and he was concerned about bonds, too, given rising interest rates. Thinking about both his risk tolerance and his required risk helped him better understand the trade-offs he was making. He could avoid taking risk now, but it meant that he might face another risk—running out of money—later.

When it came down to it, he choose to take a little more risk now. He came to terms with investing in bond funds, and the last we heard, he was looking into strategies like our Flexible Income approach that are designed to adapt to changing interest rates.

Help Getting Risk Right

Planning for a long, secure life in retirement includes trying to mitigate risk as well as making sure that you try to earn enough to reach your goals. Here’s what you can do to get on track:

Talk with your advisor

If you’ve invested your retirement assets mostly based on the risk you’re comfortable taking, this is a good time to talk to your advisor and make sure that you are invested in a way that’s also likely to meet your goals.

Read more about required risk

To learn more about the risk required to make your money last for 30 years, click here. You’ll see that taking more risk isn’t always better.

Risk Guidance for Upgrader Fund Investors

If you have a substantial investment in the Upgrader Funds, there may be more we can do to help you understand your risk tolerance and required risk. Call us at 1-800-763-8639 and ask to speak with an advisor to learn more.  

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FundX Investment Group pioneered using noload mutual funds to manage client accounts in 1969. Today, the firm uses its evidence-based investment process to manage equity, sustainable and fixed income portfolios of funds for individuals, institutions and mutual funds.

 

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