Why should investors pick less risky investments as they approach retirement?

By Steven Merkel AAA
A:

Investors must decide for themselves what the term "risky investment" means to them. At age 25, you may feel comfortable dabbling in investments that have the potential to earn returns between +50% and -30% in one year's time. However, by about age 60, your comfort level may shift to a more practical level of +12% to -8% over a year's time.

When people are gainfully employed, they have the earning power to make up investment losses that their portfolio may suffer due to poor market performance or bad judgment calls. As workers approach the five-year retirement mark, they tend to scale back asset allocation to more conservative positions to keep pace with their diminished earning power. Such measures could prevent investment losses, which have the potential to disrupt portfolio growth and delay retirement.

During the golden years of retirement, many seniors live on fixed incomes derived from social security benefits or pensions. Because of reduced earning capacity, most seniors cannot afford to suffer devastating losses from risky investments. Simply put, they have no way to replace lost funds. Asset allocation explains more than 90% of volatility on overall portfolio returns and, therefore, should be considered carefully.

When we think of "risky" investments, equities, or stocks, come to mind. When we think of "conservative" investments, fixed income products such as bonds, CDs and money market accounts are referenced. For investors in their 20s and 30s, a common asset allocation might be comprised of 80% equities and 20% fixed income. As investors approach or enter retirement, it is more common to see the allocation shift to more conservative levels of 60% equities and 40% fixed income - or maybe even 50/50.

(For more on this topic, read Weave Your Own Retirement Safety Net, Achieving Optimal Asset Allocation and Asset Allocation Strategies.)

This question was answered by Steven Merkel.

RELATED FAQS

  1. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ...
  2. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
  3. What's the difference between a financial advisor and a financial planner?

    Seeking professional advice from a financial advisor may involve asking for financial help from a certified financial planner, ...
  4. What are the main differences between Social Security Benefits & Social Security ...

    Read this article to learn about the differences between SSDI and SSI benefits, including qualifications, program funding, ...
RELATED TERMS
  1. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  2. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  3. Account Minimum

    The minimum balance required to be maintained in an investment ...
  4. Capital Growth

    The increase in value of an asset or investment over time. It ...
  5. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  6. Elder Care

    Elder care, sometimes called elderly care, refers to services ...

You May Also Like

Related Articles
  1. Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
    Professionals

    Tips For Managing A Cash Windfall

  2. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

  3. The average retiree’s check will rise by 1.7% in 2015, the Social Security Administration says. And the ceiling on taxable earnings will rise, as well.
    Professionals

    How Social Security Will Change In 2 ...

  4. Retirement

    5 Crucial Tips For Your Retirement Income ...

  5. Professionals

    Ways To Cut 401(k) Expenses

Trading Center