In our ongoing series on risks faced by a retiree, this time we want to talk about “investment risk.” When we’re saving for retirement while working, we hopefully never have to sell a retirement investment to generate income. We’re working and have a paycheck that provides regular income. But for a retiree who isn’t working, that regular “paycheck” isn’t such a sure thing, especially if it’s generated by investments.
As savers for retirement, time is on our side. We can afford to wait out a couple years of bad markets, knowing (hoping?) that our investments will grow again at some point in the future. But retirees don’t always have the luxury of time. If you, as a retiree, need income this year to live on and all you have are retirement accounts (like IRAs), you have to sell something now, even if the markets are down. You can’t expect everyone you owe a bill to wait a few years until your investments turn around.
Of course, retirees don’t have this problem when the markets are up. When times were good (like the late 90s), selling an investment for a gain was no problem. As a retiree, that was a great time for investments to be your regular “paycheck” in retirement. But for the last few years, that employer (the market) has been cutting wages.
That in a nutshell is the idea behind investment risk faced by retirees. When times are good, they happily sell their investments to pay the bills. When times are bad, they still have to sell something to pay their bills. And the very scary risk is that if times are bad long enough, they can wind up spending all their investments long before they pass away. Many retirees have a real fear of running out of money before they run out of life.
So what can retirees do to minimize investment risk? One word: diversify. Diversify your investment assets (between stocks, bonds and cash). Diversify your retirement income sources (use an annuity or reverse mortgage to guarantee income for the rest of your life). Diversify your timing: go right ahead and sell what you need to when the markets are good; maybe even sell a little more to set aside for a rainy day (or year). Then when the markets are bad again, you won’t have to sell so much from your retirement portfolio. To maximize your retirement readiness, diversification still makes sense, even in retirement.