Too Much Risk Can Ruin Your Retirement

Retirement should be a time of relaxation and enjoyment, free from the stresses and worries of work. But for many individuals, this transition can pose challenges that create anxiety, especially when it comes to managing their finances. 

One of the most important components of a successful retirement plan is balancing risk in investments. Unfortunately, too much risk can have disastrous consequences for those who have not adequately prepared. In this article, we’ll explore why too much risk can ruin your retirement, and provide some practical tips for managing it in your investments. Whether you’re nearing retirement or have already retired, this information can help you safeguard your financial future while enjoying your golden years to the fullest.

Diversification Is Key

Diversification is a critical aspect of a successful retirement strategy. When you’re working, it’s common for people to have a fairly aggressive investment approach with 100% stocks as they’re accumulating assets and seeking more growth. But when you reach retirement, you shouldn’t keep the same investments you’ve had the last few decades. As we saw during the tech bubble in the early 2000s, the Great Recession in 2007-2009, and the first few months of COVID-19 in 2020, the stock market can drop 30% to 50%, and sometimes it can do that quickly. 

What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks? 

Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that don’t fall nearly as much in a downturn, so if you need income, we can generate it from those assets while we wait for your stock portfolio to recover.

In addition, this diversification can level out the highs and lows of investment, hopefully giving you more comfort and confidence in your investment and income strategy.

Safe Withdrawal Rate Is More Important Than Rate of Return

When it comes to retirement planning, many people focus solely on the rate of return they can expect from their investments. However, what is often overlooked is the amount you will be withdrawing from your retirement fund each year. This is where the concept of a safe withdrawal rate comes in. How much can you withdraw from your accounts without the risk of running out of money later on in life? 

Last month our blog discussed the 4% rule, which is the theory about how much money you can safely withdraw from your retirement accounts each year without running out of money. The 4% rule became widely publicized after Bill Bengen’s research in 1994, which showed withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement going all the way back to 1926. 

On the surface, it may seem like withdrawing 4% is definitely the way to go. After all, the data goes back nearly 100 years! But it is important to keep in mind the safe withdrawal rate is just a guideline and should be adjusted according to your personal financial situation and goals. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement fund each year should be more important than the rate of return you receive. 

The Emotional Element of Retirement Withdrawals vs. Contributions While Working

Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a great goal and contributing to it every two weeks. But drawing down your accounts in retirement often brings a completely different emotional experience with heightened anxiety and a fear of loss. In addition, any potential losses feel like a bigger deal, since this is the only pot of money you have, and you don’t want to be forced to go back to work because it’s fallen too much. 

To mitigate this emotional stress, it’s not only important to stay within a safe withdrawal rate range (which can be easier said than done); it’s also critical to have the support of a good financial advisor who can provide the technical guidance you need, as well as emotional support and encouragement to stick with the plan. In collaboration with your financial advisor, you can make informed decisions during periods of market turbulence which will help you stay focused on your financial goals.

How Much Risk Is Right for You?

Retirement distributions management is a multifaceted process which requires close attention to both the technical and emotional aspects. If you’re experiencing confusion or uncertainty about this process, or if you’re unsure whether you’ve assumed the appropriate level of risk, our team at The Rosamond Financial Group is here to lend a hand. Contact us today by calling my office at 830-798-9400 or emailing solutions@rosamondfinancialgroup.com. See what clients are saying about working with us.

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.