How to Manage Risk as You Near Retirement

As you approach retirement, your financial focus shifts from aggressive growth to capital preservation. The goal is to protect the wealth you’ve built over a lifetime while still allowing it to grow. A key strategy for navigating this transition is managing your investment risk, and one of the most effective ways to do this is by adjusting your portfolio’s allocation between stocks and bonds. This intentional shift can help create a more stable financial foundation for your future. Learn more from Park Wealth Management.

Disclosure: Asset allocation does not ensure a profit or protect against a loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.

The Role of Stocks and Bonds

Stocks and bonds form the foundation of many investment portfolios, but their roles in a modern portfolio are more nuanced than the simple "growth vs. stability" narrative often used. Stocks, or equities, are ownership stakes in a company. They offer the potential for higher long-term growth but come with greater volatility and market risk. Their value is directly tied to the performance and perception of the company and the broader economy.

On the other hand, bonds are debt instruments where you lend money to a government or corporation in exchange for interest payments. For many years, bonds were seen as a predictable and stable source of income, providing a counterbalance to the volatility of stocks. However, the last few years have demonstrated that bonds are not immune to market fluctuations. Rising interest rates, for example, can cause the value of existing bonds to decline. It's crucial to acknowledge this reality—bonds are a key component for managing risk, but their returns and stability can vary depending on the economic environment.

How to Manage Risk as You Near Retirement1.png

Shifting Your Asset Allocation

A common strategy as you get closer to retirement is to gradually increase your bond allocation and decrease your stock allocation. This move is designed to reduce your portfolio’s overall exposure to market fluctuations. A diversified portfolio, which includes different asset classes like stocks and bonds, can help manage risk because if one investment performs poorly, your entire portfolio may not be as negatively affected.

Disclosure: There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

How to Manage Risk as You Near Retirement2.png

A Dynamic Approach to Portfolio Allocation

Instead of a one-size-fits-all framework, a more effective strategy for portfolio allocation as you near retirement is to adopt a dynamic, goals-based approach. This strategy focuses on your specific financial needs and risk tolerance rather than a generalized age-based formula. A static allocation like the 60/40 rule may not be suitable for everyone. For example, some individuals may have a pension or other guaranteed income streams, which could allow them to take on more market risk in their investment portfolio. Conversely, someone who is relying entirely on their investments might need a more conservative strategy.

A dynamic approach takes into account several key factors:

Your Risk Tolerance: Your psychological comfort level with market volatility.
Your Time Horizon: The length of time you'll need your money to last in retirement.
Your Financial Goals: Whether you're aiming for a certain level of income, a legacy for your family, or a combination of both.
Your Overall Financial Picture: This includes other assets like real estate, pensions, and Social Security benefits.

By considering these factors, we can create a personalized asset allocation strategy that evolves with your life, helping to keep your investments aligned with your unique circumstances and objectives, not just your age. This tailored approach is the cornerstone of the services we provide at Park Wealth Management.

How to Manage Risk as You Near Retirement3.png

Invest Strategically for Your Future

Attempting to time the market—moving in and out of investments to avoid volatility—rarely works and can lead to missed opportunities for growth. History shows that both stock and bond markets have been resilient, and bailing out of investments during a downturn can lock in losses and prevent you from benefiting from subsequent rebounds.

How to Manage Risk as You Near Retirement4.png

Seeking Professional Guidance

While understanding the basics of investing is a powerful tool, it's not a journey you have to take alone. A financial professional can provide personalized guidance to help you understand your risk tolerance, define your financial goals, and create an appropriate investment strategy. They can also help you track your progress and adjust your strategy as your situation changes.

Managing your investment risk as you near retirement is a critical step in securing your financial future. By strategically rebalancing your portfolio to a higher percentage of bonds, you can attempt to shield your wealth from market volatility while maintaining a steady foundation. This approach, combined with professional advice, can give you the confidence to enjoy your retirement, knowing your finances are well-positioned for the road ahead.

Tags: investment advisor stock advisor investment advice