When planning for retirement, the common advice is that you should adopt a less risky investment approach as you get closer to retiring. Is this always the best advice? Could there be circumstances where it is beneficial to maintain an aggressive stance on your retirement investments even as you are nearing retirement? Is it possible that adopting a high-risk, high-return strategy could enhance your portfolio even a year or two after you’ve retired?
It might be time to rethink your understanding of risk tolerance. The term risk tolerance refers to an investor’s comfort with the prospect of losing a part of their investment. If you are comfortable with the potential of forfeiting your investment for a shot at substantial returns, you’re considered to have a high level of risk tolerance. If you’re fine with the possibility of losing a moderate portion of your investment for a moderate return, you’re perceived to possess medium risk tolerance. Conversely, if you’re reluctant to lose any part of your investment and you are content with minimal returns, you exhibit low risk tolerance.[1] But how do you know which camp you’re truly in?
Is it ever feasible to employ a high-risk financial strategy, even as you near retirement? It often depends on your situation. People with a long investment time horizon and future earnings ahead of them—young people, for example—might benefit from a high risk tolerance. Individuals with substantial assets who have what’s known as risk capital—funds that they can allocate towards investments without worrying about losses—might discover that they can continue to make bold investment moves with high potential for both loss and gain as they near their retirement. If you’ve accumulated enough through your assorted investments and retirement accounts to sustain your lifestyle comfortably, and you have additional funds beyond that, then it might be worth contemplating higher-risk investments during your retirement period. You might consider this either to give yourself a chance to earn greater wealth for diversification purposes or for another reason, as long as these moves align with your specific financial goals and risks.[1]
When should one employ low-risk tolerance? If your savings are on the lower end and you only have just what you need to live off of, this approach may not be ideal. The thinking here is that you really can’t risk a drop of loss if what you have barely sustains you—therefore, a low-risk tolerance strategy would be sought after. Should you be in a situation where your retirement funds are just adequate for a comfortable lifestyle, it might not be logical to abruptly change your plan to take big risks. On the other hand, if you’ve saved successfully and all you really care about is preserving your wealth so you can live comfortably and provide something for the next generation, taking big investment risks may not be worth it. Overall, the traditional advice of lowering risk with increasing age might just be the starting point in understanding your true risk tolerance.[1]
If you’re uncertain about your risk tolerance or unsure of the most fitting investment approach for your circumstance, we recommend you reach out to our finance experts today for a free financial assessment. Our team can assist you in determining whether you possess risk capital and guide you on how best to utilize it. Furthermore, we can aid in crafting a custom retirement plan that considers your unique financial situation.
