The Retirement Mindset Shift: Deciding When to Ease Off Risk

Have you checked the balance on your 401(k), IRA or other retirement accounts lately?

If so, I’m sure you hoped to see that the amount is higher now than the last time you checked — and that, with any luck, it will keep going up.

It’s natural to focus on that dollar number when you’re still working and setting aside money for retirement. The goal is to see your savings increase — and then increase some more.

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But when retirement nears, it’s time for a mindset shift — a shift some people find difficult. This is when the focus needs to be less on how to grow your money and more on how to protect and use it. After all, you want what you saved to be there to provide income, not to shrink drastically overnight when the market takes an unexpected tumble. You may also hope some of your savings will be left over to pass on to your beneficiaries someday.

To protect your money effectively as you approach retirement, you will need to ease off some (though not all) of the risks in your portfolio and (here’s that mindset thing again) stop obsessing over growing the amount. Aggressive investing is fine when you are younger, still working and have time to recover from turbulent times. When you’re in retirement, and you’re withdrawing money from the account even as it’s potentially being depleted by the market, time and math are not on your side.

When risk comes as a surprise

Depending on the client, I have found that sometimes the subject of risk vs protection requires coaching on my part. Some clients are well-versed in the market and have a good handle on how much risk they are taking and how much they are comfortable with.

Others are surprised to learn they are taking more risk than they realize. For example, their 401(k) may not be the relatively safe investment they thought. Most 401(k) plans have investment options for employees to choose from, ranging from aggressive to conservative. Unfortunately, too many people enroll in the plan when they start working for a company, choose an investment option that seems right at that moment and then just let it ride. As years turn into decades, they don’t revisit their choice to make adjustments and realign their 401(k) with whatever their current needs might be.

I’ve also discovered that some people confuse an investment’s potential risk with its tax treatment. Somehow, they believe a 401(k) must be safe because they pay no taxes on their earnings from it until they retire and begin to make withdrawals.

There is no correlation between an investment’s risk and its tax classification, other than the fact that some investments are subject to higher taxes than others. That has nothing to do with market volatility, though.

The path to an informed decision

When you are within a couple of years of retirement, it’s a good idea to look at your 401(k) and determine how much risk you have taken on. Then you can decide whether one of the plan’s other options might be a better fit for you now.

Many people should reduce their investment risks at that point. However, I’ve encountered people who, after having a conversation about it, decide they are fine with the risk. These are people who, if the market suddenly drops, are willing to postpone retirement until things recover again.

But those people are making an informed decision. They know they are taking a chance and understand they need to deal with the consequences if things don’t work out as they hoped.

That’s very different from someone who is blindsided, thinking their money is relatively safe, only to watch as their account balance takes a dive just as they are on the verge of retirement. Imagine if you had planned to retire at the end of 2022, a year when the S&P 500 plunged more than 19%. If you had saved $500,000, you could have lost nearly $100,000 of it, an unwelcome scenario for the start of retirement.

What are your options as you look for other, less aggressive ways to invest your money? The answer will vary somewhat by individual. Your financial professional might advise you to keep roughly 30% of your portfolio invested in the market to generate high growth, then move the rest to investment vehicles that are less susceptible to volatility and are designed to protect your money and provide income. Possibilities include money market funds, fixed-rate investments such as Treasury bonds or CDs, and fixed-indexed annuities.

As you can see, easing off risk doesn’t have to mean eliminating it altogether. You want to find the amount that’s right for you, and a good financial adviser can help you do that. Together, you can review your investments, determine their current risk level and explore what options will be best to help you achieve the retirement you desire.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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