What is your portfolio risk?

Mitigating risk in your retirement portfolio

Retirement can be a risky business. Do you know if your retirement portfolio will provide enough income to meet your needs? 
 

What is your portfolio risk?

Portfolio risk is the possibility that the actual return from your total investment turns out to be less than what you expected and planned for. Questions to consider when thinking about your own portfolio risk include:

• Will the market take a downturn leading up to your retirement date - when you can least afford it?
• Will declining health – yours or a loved one’s – eat away at your resources?
• Will inflation take away some of your purchasing power due to increases in pricing of goods and services?
• Will you outlive your assets?

You can’t know exactly what’s ahead and how it will affect you, but you can help mitigate portfolio risk by preparing for any bumps that may intrude along your path to retirement.
 

Integrating personal risk with portfolio risk

Portfolio risks are those that affect you as you age, including those that concern your health and living situation. Longevity is a gift, but many people worry about outliving their retirement savings. And for good reason; the latest retirement statistics reveal that 32% of investors underpredict their lifespan, making them vulnerable to running out of retirement income.¹ You can address this concern by delaying your retirement – and, in particular, your Social Security benefits – until age 70.

Others worry about the risk of high, unexpected healthcare costs; even with Medicare, a 65-year-old couple could pay $315,000 over their retirement in Medicare premiums, copays, and out-of-pocket costs.² To reduce this risk, consider Health Savings Accounts, Medicare Supplement insurance, and long-term care insurance.

Personal risks affect the money you need in retirement, and portfolio risks deal with the performance of your investments. It’s all tied together because one certainly has potential to affect the other.

For example, even though inflation has cooled for now, it reached a new 40-year high in June 2022.³ The argument can be made that this affected retirees on a fixed income more than the rest of the population. Suddenly, healthcare, groceries, travel, and more were eating into their budgets more than expected.

To mitigate this and other portfolio risks, your financial professional may suggest you consider diversifying^* your investments with commodities such as real estate, floating-rate bonds, and Treasury inflation-protected securities. You’ll also want to discuss ways to mitigate stock market and global uncertainty, tax risks, and more.

With time, money, and effort, you can mitigate some but not all portfolio risks. So, which risks can, or should, you accept? How much risk can you live with? There is no single right answer to these questions. Your answers depend on your goals, on where they fall on Maslow’s Hierarchy, and on your circumstances, such as your age, years until retirement, health, and other sources of income.
 

Diversifying your portfolio risk

Do you know what your risk tolerance and risk capacity are? 
 

Risk tolerance

Risk tolerance refers to the amount of risk you can take until your anxiety kicks in and says, “No more!” It’s how much volatility you’re willing to endure in the value of your investments.
 

Risk capacity

Risk capacity, on the other hand, refers to the amount of risk you can actually handle financially. How many years can you draw on your retirement income to meet your monthly budget and expenses before it dries up? This is a conversation to have with your experienced, trusted financial professional. The more they know about your risk tolerance and capacity, the better they can propose retirement strategies with the right mix of assets for you.

That “mix” is a crucial concept, with broad applicability to financial planning. To balance risk and reward, for example, you can diversify your portfolio with a mix of investments that are collectively designed to preserve your capital, generate steady income, and enable growth. Your goals, risk tolerance, and capacity aren’t the only factors that help determine the mix that’s right for you. You’ll also want to consider your age and the number of years you have until retirement.

As those numbers change from year to year, so should your mix of assets – also called “asset allocation” – in your diversified portfolio. For example, in your youth, you can afford to invest mostly in stocks because their relatively high returns will grow your nest egg, while you have time to recover from periodic downturns in the market. As you age, you’ll want to invest more and more in bonds, which do a better job of preserving your savings as you get closer to retirement, albeit at the cost of slower appreciation.
 

Annuities to help address portfolio risk

Bonds aren’t the only relatively conservative asset you’ll want to pay increasing attention to as you get closer to retirement. Annuities are another retirement product that can provide reliable, protected income when you need it. They can help bridge the gap between your retirement savings and traditional sources of retirement income, such as Social Security.

Long-term care insurance, which we mentioned earlier, is another dependable source of income to address sudden needs for certain types of healthcare expenses that Medicare doesn’t cover.

Portfolio income insurance is another way to hedge your bets against a downturn in your portfolio’s value.

Want to learn more about portfolio risk and how you can prepare for it? Download a free copy of our white paper, Retirement planning is full of risks: Here’s how to manage them. It’s a great conversation starter for discussions with your financial professional.

Talk to your financial professional about your retirement goals and how an annuity may help you mitigate portfolio risk.