Key Steps to De-Risk Your Retirement Plan

There are several risks you may face during retirement. Since this phase is often considered the final stage of your financial journey, you may have limited flexibility to recover from setbacks if things do not go as planned. Retirement risks are real, and it is important to start planning for them early to ensure a smooth and secure future. Let’s explore the different types of risks involved in retirement and how you can manage retirement risk.

What are the different types of risks in retirement, and how can you de-risk a portfolio?

You can face a number of different risks in retirement. One of the biggest risks is inflation. Over time, the cost of living continues to rise, sometimes gradually and sometimes quite sharply. If your savings do not keep pace with inflation, the value of your money reduces. This will erode your purchasing power over time, and you may find it hard to cover basic expenses in retirement.

Another key risk is healthcare risk. As you age, your medical needs will increase. You may be on medication for lifestyle disorders. You may have surgeries for injuries or other ailments. It is important to be realistic about how these expenses can occur more often than expected as you get older. Healthcare costs can be unpredictable and, in many cases, quite high. Without adequate preparation, these expenses can strain your retirement savings.

You should also consider longevity risk. If you live longer than you have saved for, you may run out of funds. Outliving your savings can create financial stress later on and force you to depend on others.

Market risk is another factor that can impact your retirement. If you witness a period of volatility and the value of your investments fluctuates, your retirement plan can be affected. Market risk can be further exacerbated by the sequence of returns risk. This refers to the risk of poor market returns in the early years of retirement. If you experience poor market performance early on, you may have to draw more to cover your expenses. This can leave a smaller nest egg for the later years.

Now, with all these risks and more, you should also know how to de-risk your investment portfolio. Let’s find out.

1. Turn to fixed-income options in retirement to lower risk

If you are wondering how to manage retirement risk, one of the first things you can do is look at your portfolio. Does your portfolio include options that contain high risk? If you are thinking about how to manage risk in retirement, one of the first places to look is your portfolio.

During your younger, working years, you can take on more risk and invest in relatively volatile investments that can potentially help you grow your wealth over time. But as you approach retirement, your priorities need to shift toward protecting what you have built over the years. If your portfolio still holds a large portion of high-risk investments in retirement or the years leading up to it, a sudden drop in the market can reduce the value of your savings at a time when you may not have the option to wait for a full recovery. Gradually moving toward more stable, income-focused investments can be a wise move to make during this phase.

Fixed-income options like bonds, Treasury Inflation-Protected Securities (TIPS), and money market funds are generally more stable than equities. They can potentially provide a more predictable stream of income. And while they may not offer the same high returns, they can help reduce the risk of your portfolio. You can still invest in some growth-oriented options, so your money can keep up with inflation, but a larger portion of your portfolio may need to be shifted toward preservation and stability. You can gradually shift your money over time as you approach retirement.

If you are at the phase when you are nearing retirement, speak to a financial advisor and ask them how you can de-risk your investment portfolio. They can help you assess your current portfolio and suggest investments that align with your risk tolerance.

2. Look for tax-friendly, reliable retirement planning options

Tax is one of those things that can make retirement harder. When you start retirement planning, you can turn your attention to options that offer tax advantages. Accounts like a 401(k) and an Individual Retirement Account (IRA) are often go-to choices for most people for this reason. They allow your investments to grow without being taxed during the contribution stage. A 401(k) also comes with the added benefit of employer matching in many cases. This can help you build your savings faster. However, most 401(k) plans are traditional. So, the tax is deferred. But you cannot avoid it forever. You do not pay taxes while the money is growing, but you will have to pay them when you withdraw funds in retirement.

However, retirement is when you might want more control over your income and expenses. Having to pay taxes on withdrawals can affect how much you actually get to use for your financial needs. A simple solution to this can be a Roth conversion.

You can move your funds from a traditional 401(k) into a Roth IRA. When you do this, you pay taxes on the amount being converted at that time. After that, the money can grow and be withdrawn tax-free in retirement, as long as certain conditions are met. However, keep in mind that the conversion is treated as taxable income. The amount of tax you pay depends on your income and tax bracket in that year. You can speak to a financial advisor about the best time to make the conversion, depending on when you plan to retire. Some people consider doing this in a year when their income is lower, so the tax impact is relatively smaller.

Being mindful of taxes as you build your retirement savings can help you reduce risks you may face later. It can make your savings last longer, which helps counter longevity risk. It also leaves more of your money available, which can help tackle inflation in the future.

3. Plan your withdrawals well

Planning your withdrawals is a key part of de-risking your investment portfolio for retirement. When you reach retirement, you may feel you have finally arrived at the stage where you can use your money the way you want. After all, you have spent years building this corpus. And, it has taken your life’s savings to get here. But this is also where you need to slow down and be a little careful. You need to think about how long this money needs to last in retirement.

For this, you need to have a withdrawal strategy in place. The 4% withdrawal strategy is a common guideline some people use. Under the rule, you can withdraw about 4% of your retirement savings each year. You can also adjust it gradually over time to factor in your needs and inflation.

You also need to understand the rules around your retirement accounts. For example, accounts such as a Traditional 401(k) and an IRA require Required Minimum Distributions (RMDs). These usually begin at age 73 for traditional accounts. If you do not withdraw the required amount, you could face penalties and additional taxes.

Another thing to keep in mind is how you plan your withdrawals. If you stick to a fixed withdrawal rate no matter what is happening in the market, you could run into trouble eventually. Markets go through ups and downs, and withdrawing the same amount during a downturn as you would in an uptrend can affect your savings. So, you might want to consider a more flexible approach. Instead of a fixed rate, when markets are down, you can reduce your withdrawals, and when markets perform well, you can take out a bit more. This can help your savings last longer.

If you are unsure how to structure your withdrawals, speaking to a financial advisor can help. Since this is an area where you should not make any mistakes, getting a professional’s opinion can be helpful.

4. Prepare for the obvious costs

Another way to de-risk a portfolio is to prepare for large expenses you know will crop up. Some costs are almost certain, such as healthcare, especially as you grow older. Preparing for them in advance can lower the risk of depleting your savings in retirement.

Medical expenses tend to increase with age, and having health insurance is essential. It can help you cover the cost of medicines, unexpected medical bills from accidents and ailments, and prevent you from dipping into your retirement savings. You can also think about using a Health Savings Account (HSA) if it is available to you. An HSA allows you to set aside money specifically for medical expenses. It comes with triple tax advantages, which can make it even more effective over time. The contributions are tax-deductible, and the investment growth is tax-free, helping you save more. Additionally, the withdrawals for qualified medical expenses are also tax-free. So, as long as you use the money properly, you can cover all your healthcare needs and keep your tax bill low.

Another area that often gets overlooked is long-term care. You may need additional support as you grow older to live your life. You may need to hire a caregiver or even move into an assisted living facility or nursing home when you are older. These services can be quite expensive and are usually not fully covered by standard health insurance plans. Long-term care insurance can help you cover the cost of care and reduce the financial burden on your savings. Without it, it may be hard for you to stay afloat.

It is important to plan for these costs ahead of time instead of reacting to expenses as they arise. This can give you more breathing room to manage your finances and also keep peace of mind.

Knowing how to de-risk your investment portfolio is important before retirement

Understanding the risks that await you in retirement is essential and knowing how to manage them is just as important. Some of these risks may already be on your radar, while others might not have crossed your mind yet. Taking a little time to go deeper can prepare you for the future.

A good place to start is simply listing your concerns and potential risks, such as rising expenses, healthcare costs, how long your savings will last, and how they will fare against market fluctuations. Once you put these down on paper, you can start working on them.

You can then take this list to a financial advisor and ask for their input. They can help you look at each risk more clearly, point out anything you may have missed, and guide you on what to prioritize. From there, you can refine your plan and adjust it based on your risk appetite and retirement goals. If you want to hire a financial advisor who can help you understand how you can manage retirement risk, consider using our financial advisor directory that connects you to financial advisors in your area.

Frequently Asked Questions (FAQs) about how to de-risk your investment portfolio in retirement

1. What are the different types of risk that you may face in retirement?

There are several risks that can affect your financial stability during retirement. Some of the most common ones include:

• Inflation risk
• Longevity risk
• Sequence of returns risk
• Healthcare risk
• Market risk

There can be other risks as well, but these are some of the key ones to be aware of.

2. Is it important to plan for retirement risks in advance?

Yes, it is very important. Planning ahead gives you time to prepare. It allows you to take things step by step instead of reacting under pressure. Waiting for situations to arise can leave you with very little time to respond and make things more stressful and harder to manage.

3. Can a financial advisor help me manage risks in retirement?

Yes, they can. A financial advisor brings experience. They can help you understand the risks you may face in retirement and help you build a plan. Hiring them helps you transition into a more comfortable retirement.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As an SEC-registered investment advisor (RIA) firm, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management based on a solid, proven research approach. Additionally, each client receives comprehensive financial planning to help them move toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.