When you’re still decades away from retirement, your portfolio has time to recover from a market downturn. But as you approach the date when you ꧒leave the traditional nine-to-five behind, your window for recovery shrinks. As a result, your ability to take risks will likely diminish. Your investment mix needs to be able to support your𓂃 portfolio throughout retirement while maintaining stability during periods of volatility.

Let’s explore wh✨at it takes to manage risk and return as retirement nears.

Understanding Risk and Return

A general investment principle called the risk-return tradeoff states that as✤ risk rises, so does the potential return. Certain investments, like stocks and other equities, are considered higher risk than assets like bonds and cash equivalents. That's because stocks and equities have higher levels of uncertainty regarding h🌱ow they’ll perform in the future. In exchange for assuming this risk, investors benefit from a higher return potential.

In terms of 澳洲幸运5开奖号码历史查询:retirement, managin🍌g the right levels of risk and return becomes an increasingly important balanci🍎ng act. 

“When approaching retirement, you don’t have the same time frame to make up losses as you do when you’re younger,” says , ChFC®, ChSNC®, FPQP®, NSSA®, a♛nd vice president of TFS Advisors in Edmonds, Washington. “Risk is your friend when you’re in the accumulation phase, but it’s your enemཧy in the decumulation or distribution phase of your life. With that being said, some level of risk often needs to be taken to at least keep pace with inflation.”

If you are either fast approaching or already in retirement, you need to consider how experiencing too much risk during a market downturn could impact your portfolio’s longevity once you begin relying on it for income.

The Importance of Asset Allocation

澳洲幸运5开奖号码历史查询:Asset allocation refers to how your capital is divided among differe𒊎nt asset types in your portfolio. The three most common asset classes are equities (stocks), fixed income (bonds), and cash or cash equivalents (certificates of d𒉰eposit).

Ideally, as you age or your financial circumstances change, your portfolio’s asset allocation should change as well. In your 20s and 30s, when you’re decades away from retirement, you have an opportunity to be aggressive with your investment choices. Wit🅠h more time to recover from losses or downturns, your portfolio can handle a larger sh🐻are of equities.

But as your priorities shift or near-term goals emerge (like home buying or college planning), your investment needs may change. Because you anticipate accessing some of your portfolio’s funds sooner, a more balanced asset allo✱cation may work better for you.

Generally, once retirement comes into view,ಞ that’s when your portfolio’s asset allocation should shift to a more co✤nservative make-up. Rather than prioritize higher-risk assets in the pursuit of growth, you should focus on preservation and longevity. These goals align more closely with cash equivalents and fixed-income assets.

Assessing Your Risk Tolerance

Risk tolerance refers to how much risk you are comfortable taking on within your portfolio. While it does depend on certain quantitative factors like age, cash flow, ♐and spending goals, there are some more qualitative considerations to keep in mind when determining your portfolio’s asset allocation.

“I believe that risk tolerance, at all phases of life, is a balance between people’s financial capacity to take on risk and their emotional capacity to stay the cour♏se during periods of volatility,” says , owner, and wealth manager of Daybreak Wealth. 

“It’s important for people in transition, ꧃like moving from full-time employment to retirement, to deteওrmine if either of these factors has changed and adjust their portfolio allocation to reflect their new circumstances,” she continues.

To determine your risk tolerance, consider how comfortable you are with the possibility of losing money. Will you be okay financially and emotionally if you experience a substantial loss? Or are you better off moving to a more conservative investment and reducing some risk? Some people 澳洲幸运5开奖号码历史查询:prefer to minimize ri🍌sk at all costs and are willing to forego the opportunity to achieve higher re🦩turns for it. Others are more comfortable with the level of risk involved and want to pursue bigger growth opportunities. 

Strategies for Managing Risk Near Retirement

Because of the established correlation between risk and return, investors typically pursue a portfolio that has an adequate level of diversification based on theirꦆ age and general tolerance for risk. This concept becomes increasingl🔯y important as retirement draws nearer. 

Assets with varying risk levels (and by association, growth potential) play different roles in an investor’s portfolio. While assets with higher levels of risk are used to pursue growth more aggressively, more conservative assets help level out volatility and offer stability and protection. Both asset types are necessary for anyone nearing retirement because they help you accomplish two things: Build a l♑ong-lasting portfolio and mitigate market downside risk along the way.

“The key to 澳洲幸运5开奖号码历史查询:managingꦫ risk as you near retirement is twofold: diversification and adaptability,” says , CIMA®, CSRIC®, managing partner, and senior wealth advisor of Talisman Wealth Advisors. “Diversification means spreading assets across a risk spectrum: Cash for short-term needs, bonds and dividend stocks for mid-term stability, and equities for long-term growth. Adaptability comes from active moni🔯toring, rebalancing, and a disciplined yet flexible withdrawal strategy to navigate market changes."

Balancing Growth and Safety

While your priorities in retirement tend to shift towards portfolio preservation and stability, maintaining some opportunities for growth is still important. Equities can help your portfolio ♑continue to grow throughout retirement, even as you make regular wit🎉hdrawals, mitigating the risk that you’ll outlast your assets. They can also help your portfolio maintain its purchasing power as inflation rises year after year. 

Yet, as we’ve established, these opportunities for greater growth come with higher risk. This is where a balanced portfolio comes into play. 澳洲幸运5开奖号码历史查询:Fixed-income assets, like bonds, offer investors steady payments over a certain period of time, plus the principal amount returned at the end. While there’s still risk involved in the bond market, it’s generally less volatile than the stock market. You can also opt for bond issuers with high ratings or greater credibility, like the U.S. Treasury or local governments. Even within the world of bonds, the level of risk still impacts the potential returns.

Rebalancing Your Portfolio

As your portfolio experiences growth and losses, its asset allocation will shift over time. Say you have a portfolio comprising 60% equities and 40% bonds. In a period of posit🐼ive stock 🍒market performance, your equities will likely grow. As a result, your asset allocation may shift away from the benchmark you’ve been using based on your risk tolerance and time horizon to retirement. To get your portfolio back to your intended asset allocation, you would need to rebalance it.

“Rebalancing is important because it can keep the portfolio in line withꦇ an investor’s ꦿlong-term goals and objectives,” Hunt explains.

澳洲幸运5开奖号码历史查询:Rebalancing can also help you realign your portfolio as your priorities shift. The closer you get to retirement, for example, the more often you may want to reassess and potentially rebalance your portfolio in an effort to manage risk and return.

But if you rebalance too often, you may rack up unnecessary transaction fe♈es. Wait too long, and your portfolio could stay exposed to more risk than you’re comfortable with.

Considerations for Tax Efficiency

Just as diversification applies to your portfolio, it should be considered in terms of your tax obligations in retirement as well. Taxes, when left unmanaged, have the potential to diminish returnඣs, especially when you pay more over time than is necessary.

You may want to consider incorporating tax-f✃ocused strategies into your retirement portfolio, especially if you’ve concentrated your efforts on growing one type of account, like a 401(k) or IRA. While these are effective tax-saving tools, any withꦅdrawals you take in retirement will be subject to ordinary income tax.

Consider what other sources of income you’ll be able to draw from in retirement and how they’ll impact your annual tax bill as well. A Roth conversion, for example, could be used to convert a portion of your existing 401(k) or traditional IRA into future tax-free income.

The Bottom Line

All investments come with risk, but as you near retirement, the key is to consider how much risk is worth including in your portfolio. Your asset allocation should evolve to accommodate your need for protection and stability as your goals change or your time horizon to retirement shortens. By leveraging a mix of investment vehicles with different levels of risk and growth potential, you can better address your need for future retirement income with your desire to protect your portfolio from unexpected market movements.