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Common investment advice is to move toward “safer” assets as retirement approaches. Bonds instead of stocks. More cash. Stable income compared to growth.
But in retirement, the definition of secure may change. When your portfolio must generate income, protect against inflation, and withstand market volatility, some traditionally conservative investments may bring new risks. Financial advisors point out which previously safe investments you may want to reconsider.
Also check out what retirees invest in the most, according to ChatGPT.
long term bonds
According to Eric Gudge, owner of CFP, bonds are often grouped into a conservative bucket, but not all bonds behave the same. uwest advisory. “Long-term bonds have the additional risk of being very sensitive to changes in interest rates along the yield curve. This is called duration risk.”
He pointed out that retirees who may need to complete their portfolio distributions early are facing unnecessary uncertainty through bonds. “If interest rates rise, the price of long-term bonds will fall much more than short-term bonds. The reverse is also true, but this adds uncertainty to the portfolio,” he said.
Robert R., financial advisor and professor of finance in the Heider College of Business. Johnson, Ph.D. According to , investors often misunderstand that bond values, even US government bond values, can be volatile with changes in market interest rates. Creighton University.
Bonds can reduce the volatility of stocks, but they can increase interest rate risk when retirees need stability.
Dividend Stocks (Sometimes)
Dividend-paying stocks are often marketed as a retirement income solution because they can be tax-efficient and historically reliable. However, Gudge cautioned that dividend payments are never guaranteed. “Companies have the right to reduce, pause or even stop dividend payments altogether, and this has happened frequently in the past,” he said.
Johnson also warned against “chasing yield”. He pointed out that some stocks with very high dividend yields are likely to have unsustainable dividend levels. He encouraged diversification.
Cash, CD and Money Market Accounts
Cash-heavy portfolios feel safe because your money is liquid. But they come with other problems.
Gudge said that concentrating heavily in certificates of deposit (CDs) or money market funds exposes retirees to “reinvestment risk,” meaning future yields could be lower.
Johnson points out that low-yielding assets can protect against short-term volatility but can increase “shortage risk,” or the possibility that the value of your portfolio will fall below what is necessary or desired.
During a retirement lasting 30 years, a portfolio that fails to grow may lose purchasing power.
order of return risk
Johnson points out that even a well-constructed portfolio can fail if market losses occur at the wrong time. He called the five years before retirement the “retirement red zone”, in which large declines in equity markets can have a devastating impact on a retiree’s quality of life.
This risk is especially acute early in retirement and often necessitates adjusting withdrawals or maintaining a bond ladder, Gudge said.
Warning Signs a Portfolio is Too Conservative
Although some investments may not be right for retirees, both experts agree that a bigger danger is having little or no exposure to equities.
Gudge said equities act as an inflation hedge and growth engine. Retirees may not need to accumulate wealth, but they still need a portfolio that can sustain spending for decades.
In retirement, playing it safe means managing the trade-offs. Strive for sufficient stability to meet near-term needs and sufficient growth to maintain independence over time.
Editor’s Note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including possible loss of principal. Always consider your individual circumstances and consult a qualified financial advisor before making investment decisions.