Investment Risk in Retirement – Putting it all together
In the last few blog posts, I’ve considered various aspects of investment risk in retirement, looking at how risk is different in retirement than it is in other phases of your financial life.
It is essential to spend a little more time determining how much risk you will take in your portfolio when you first retire, and this should be an iterative process with your financial planner – starting with an assessment of your risk personality, then adapting this to take account of your capacity for loss, in order to arrive at a risk level with which you are comfortable.
It should also take some account of your previous experience of investments, and the extent to which you want to be involved with your portfolio once you have stopped work.
This can take some time and is likely to require a few discussions with your financial planner – but it is worth taking the time to make sure you get things right.
And once you have established the initial risk level, you shouldn’t just leave it at that – whilst your risk personality won’t change much from year to year, your capacity for loss probably will – if your investment portfolio goes up in value, your capacity for loss should increase and you may be able to take more risk; if your portfolio falls in value, the opposite is likely to be true.
Alongside this, you will need to consider the expected decline in your financial literacy.
This happens to everyone, regardless of their starting point, and it would be foolish to imagine that it won’t happen to you.
It means that it become increasingly important to work with a trusted financial professional as retirement goes on, and you are likely to make better choices about who to engage the earlier you do it.
The amount and types of risk which you take with your retirement savings need to be reviewed regularly (we’d suggest at least annually).
Experience suggests that people often want to take less risk as they age, but this is by no means the case across the board, and changes in your capacity for loss usually have a greater impact on your portfolio than changes in your personality.
It’s essential that the risks in your portfolio reflect your changing requirements; and it’s very unlikely that any two people’s risk personalities and capacity for loss will be identical.