When Playing It Safe Is Not as Safe as You Think
Not Taking Enough Risk in an Investment Portfolio During Retirement
As retirees approach the golden years of their lives, they must make some increasingly criticial decisions regarding their investment portfolios. With the aim of preserving their hard-earned wealth and ensuring financial security throughout retirement, many individuals opt for a conservative approach by avoiding risks. However, this very cautiousness could potentially lead to missed opportunities and diminished returns, highlighting the delicate balance between security and growth.
In recent years, a prevailing sentiment has emerged among retirees to prioritize capital preservation over growth. The traumatic memories of market crashes, economic downturns and financial instability often influence this mindset. As a result, retirees often flock to low-risk, low-return investments such as bonds and certificates of deposit. While these options do offer a sense of security, they might not be sufficient to maintain the purchasing power required to meet the rising cost of living and unforeseen medical expenses in the long run.
Purchasing Power Erosion
The erosion of purchasing power due to inflation is one of the most significant risks retirees face when they don’t take enough risk in their investment portfolios. Inflation can silently eat away at the value of fixed-income investments over time, leaving retirees with a reduced standard of living. By overly focusing on safety, retirees might find themselves in a paradoxical situation where their portfolios are not generating enough returns to keep up with the increasing costs of daily life.
Increased Retirement Costs
Moreover, the longevity risk cannot be ignored. With advancements in healthcare and increased life expectancy, retirees today are facing the possibility of spending three decades or more in retirement. While a conservative approach might provide short-term security, it might not be sustainable over such a long retirement period. Inadequate returns could lead to the depletion of funds, leaving retirees dependent on government assistance or family support later in life.
That’s why financial experts argue that not taking enough of an investment risk during retirement can expose investors to increased risk. So, if prioritizing capital preservation isn’t the best approach, what are some strategies investors should consider as they approach retirement age?
Diversification
Financial advisors often emphasize the importance of diversification and balance in investment portfolios. Diversification allows retirees to spread their risk across different asset classes, reducing the impact of poor performance in any one area. While it's true that the stock market can be volatile, historical data shows that over the long term, it has outperformed other investment options and provided a hedge against inflation.
Individual Risk Tolerance and Goals
Retirees should also consider their individual risk tolerance and financial goals. It's not a one-size-fits-all scenario. Some retirees might be comfortable with a more aggressive investment strategy that offers potential for higher returns, while others might need to strike a balance that aligns with their risk tolerance and income needs.
In conclusion, the tendency to play it too safe with investment portfolios during retirement might seem prudent at first glance, but it carries its own set of risks. Failing to generate enough returns to combat inflation and sustain a comfortable lifestyle throughout retirement can be a significant concern. Retirees are encouraged to seek advice from financial professionals who can tailor an investment strategy that aligns with their unique circumstances, goals and risk tolerance.
In the end, balancing safety with growth is one of the keys to helping navigate the complex landscape of retirement investments and helping secure a stable financial future.
Any opinions are those of Southern Springs Capital Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
As Financial Advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer and is independent of Raymond James Financial Services.
David Jackson, MBA, CFP®, C(K)P™, is the Managing Partner at the Southern Springs Capital Group. For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4585.
