In finance (and in everyday life) it’s impossible to completely eliminate all risk factors. And that’s a good thing. Without risk, there wouldn’t be a reward—the positive outcome of finding yourself on the right side of a less-than-certain situation.
Right-sized risks can lead to healthy returns and valuable dividends. But a little too much financial risk, or risk at the wrong times, can impact the growth and stability of your hard-earned wealth.
Understanding how to manage financial risks before and during retirement doesn’t just secure your financial future—it empowers you and your family to prepare for what’s to come and enjoy life now.
As you approach retirement, a few financial risks are worth planning for.
As your highest earning years come to an end, and you transition from what’s now to what’s next, the term “financial risk” takes on a new meaning. It’s no longer just about the ups and downs of the stock market. Unintended financial risk after your peak earning years can mean losing money, struggling with cash flow, and finding your liquidity limited.
To ensure the wealth you’ve accumulated over a lifetime continues to serve you in the next phase of your life, it’s important to plan for these common financial risks:
- Market volatility. For retirees, a significant market downturn can seriously impact the value of your investments, especially if you have to make withdrawals from a diminished portfolio.
- Inflation risk. This often-overlooked risk factor can reduce your purchasing power over time—especially if you’re retiring early.
- Longevity risk. With advancements in healthcare, retirees are living longer than ever. While a longer, healthier quality of life is a positive benefit, it also means your retirement savings needs to last for a few decades, or more.
It’s not easy to talk about financial risk, potential downturns, or outliving your savings. But the importance of identifying and planning for these risks can’t be overstressed. The earlier you anticipate potential risks, and build a financial plan that mitigates them, the more options you have to create a secure financial future.
If you haven’t yet retired, these steps can help you right-size your financial risks.
Your pre-retirement years are your best opportunity to build up a robust buffer against potential financial shocks, so your finances are optimized for the long haul.
One way to make the most of these crucial years is to increase your savings rate and make sure you’re saving in the best places. There’s no “wrong way” to save, but there are a few tax-smart and future-focused savings options—like the ones we share here—that can significantly improve your ability to weather market volatility in the years to come.
The second thing you can do to accelerate your pre-retirement savings is to optimize your taxes. If you don’t already have a tax-smart investing plan in place, our team can help you put one together that minimizes your tax burden and maximizes your take-home pay, using a mix of tax-advantaged retirement accounts and tax-deferred investments.
Finally, diversification and proactive rebalancing can help you adjust your risk level year-by-year, as you approach retirement. Diversification, spreading your investments across a mix of equities and bonds, reduces your exposure to any single asset’s volatility. And rebalancing your portfolio from a more growth-oriented set of investments to conservative, preservation-geared investments further helps protect your portfolio from market downturns.
Is travel on your retirement wish list? Fit it into your financial plan now, so you can enjoy the moment later.
If you’re already retired, these steps can stabilize your risk.
Once you’re in retirement, your financial focus should shift from accumulation to preservation and tax-smart distribution, so your savings stretch throughout your retirement years.
A key aspect of risk management in retirement is calculating a sustainable withdrawal rate. The percentage of your portfolio that you can withdraw each year without running the risk of outliving your assets may change a bit based on market factors and the performance of your investments, so this number is best determined with the help of your financial advisor. Once decided, reevaluate your withdrawal rate annually to make sure your longevity risk hasn’t changed.
The second step you can take to manage your financial risk in retirement is to focus on fixed-income investments, like bonds, treasury securities, and other low-risk assets. These investments provide regular income, while preserving your capital, and are less volatile than stocks.
Finally, in retirement, it’s important to carefully consider when and from where you withdraw your funds. Pulling money from investments can trigger an unexpected capital gains tax bill, and can impact your dividend earnings in the years to come. But pulling money from your high-yield savings account or Roth IRA is generally tax-free.
In retirement, every major money move you make is worth discussing with your financial advisor. We’re here to help you get the most joy, satisfaction, generosity, and peace of mind out of retirement—and make the kind of financial decisions that benefit you and your legacy for decades to come.
Ready to plan for a confident retirement?
At Cook Wealth, our tax-smart and future-focused retirement plans combine saving, investing, and tax management strategies that help you maximize your Golden Years. By considering the goals and values that matter most to you, and building a comprehensive plan around them, we help our clients protect and enjoy their hard-earned savings—so they can retire with confidence.
To talk about your retirement goals, book an intro call with our team.