posted in: Retirement Planning

How Much Risk Should You Take in Retirement?

Almost everyone approaching retirement has absorbed the same piece of advice, which is that it is time to take less risk. The honest answer is that it depends, because “less risk” only makes sense relative to where you are sitting today and what else you own. Understanding how the decision is actually made is what lets you work out whether your current settings are right for you or simply conventional.

In this article, I’ll walk through why stability matters more once your income stops, what a large fall actually does to a portfolio you are drawing from, why being too safe can damage you just as badly, and why the assets sitting outside your superannuation change the answer completely.

Less Risk Than a 20-Year-Old, Not Automatically Less Than You Have Now

Let me start with where the general advice is right, and where it quietly goes wrong.

In general, we want to see you take less risk than a 20-year-old, for example. But it doesn’t mean that everyone should drop risk, because it depends on where you’re sitting right now. And it depends on your other asset classes, too.

Those two sentences are doing very different jobs. The first is a sensible comparison to somebody with forty years of contributions ahead of them. The second is the part people skip. “Less than a 20-year-old” is not the same instruction as “less than you currently have”, and plenty of people approaching retirement are already sitting more conservatively than they should be.

Why Stability Matters Once the Pay Cheque Stops

The reason risk is treated differently in retirement is not that markets behave differently. It is that you do.

We want to make sure that your portfolio over time, when you’re retired or even in the approach to retirement, is more consistent, more stable, more reliable, because you’re no longer getting that employment income. You’re relying on the income off your portfolio.

While you are working, your salary absorbs the shocks. A bad year in markets is uncomfortable but it is not a cash flow event, because your life is being funded by something else entirely. The moment you stop, the portfolio is both your growth engine and your pay cheque, and those two jobs pull in different directions.

The Real Cost of a Large Fall Is Not the Fall

This is the part I want people to sit with, because the danger is not the number on the statement. It is what the number forces you to do.

If your portfolio is too aggressive and drops by 40%, but then you need to go out for dinner and buy steak and a glass of wine, well, it’s going to be difficult for that portfolio to do that. You’ll probably be selling everything while it’s down, restricting its ability to recover.

That last clause is the whole thing. A working investor who sees a 40% fall does nothing and waits. A retiree who sees a 40% fall still has to eat, so they sell into the fall, and every dollar sold at the bottom is a dollar that never participates in the recovery.

The market recovering does not mean you recover. You have permanently removed part of the portfolio at its worst possible price, and no subsequent good year gives that back.

Being Too Safe Is Also a Risk

So the obvious conclusion is to get out of harm’s way entirely. That conclusion is wrong, and it fails slowly enough that people do not notice for years.

We don’t want you to put it all in cash, because cash is going to generate you a pretty safe return, but it’s going to be low. And if you’re spending more than what that cash return is, or even not much of it, your portfolio is probably going to come under pressure in terms of its ability to last you.

Cash feels safe because the balance never falls. But a retirement can last thirty years, and over that horizon the thing quietly eroding you is not volatility.

Think about a million dollars today. It’s a lot of money today, but in the 80s it was worth a lot more. So we want to make sure that that portfolio is growing with inflation.

A million dollars is a serious amount of money right now. Put yourself forward the same distance you would have to go back to reach the 1980s and ask what it buys then. A portfolio that never falls but never grows is not protecting you, it is losing to inflation on a schedule you cannot see on a statement.

So it is a balance, and both ends of it are genuinely dangerous.

Your Super Is Not the Whole Picture

Here is where most of these conversations go wrong, which is that people set the risk level on one account in isolation.

If, for example, you have a defined benefit pension where you’re paid a certain amount each year linked with CPI, and that’s enough for you to live off and you want for no more, well, that investment that you’ve got in super, for example, or shares or whatever it might be, that might be a great legacy asset, and you might invest that as though you were a 20-year-old, because you don’t need it, you don’t want it, and you want to invest it over the long term and get the best rate of return for your estate.

That example completely inverts the standard advice, and it is correct. If an indexed pension already covers your lifestyle, the super balance is not funding your retirement at all. It is funding your children, or a gift you might make while you are alive to see it, and money with a thirty year horizon and no drawdown requirement should not be sitting in cash.

The same logic applies to investment properties and any other assets producing income outside the portfolio. Your risk setting is a decision about your whole financial position, not about the box you happen to be looking at.

So, How Much Risk Should You Take?

I want to be very clear about the conclusion here, because it is not a compromise position or a fence-sit.

I wouldn’t necessarily say rule of thumb you want to reduce your risk. You just want the right level of risk, because if you take too much risk it can jeopardise your portfolio. If you take too little risk it can jeopardise your portfolio. We want the right level of risk.

Both errors end in the same place. Too much risk and a bad sequence of returns forces you to sell your future to fund your present. Too little and inflation takes the same ground from you, just slowly enough that you do not notice until the options have narrowed.

The right level is the one that funds your actual spending without forcing you to sell at the bottom, while still growing fast enough to keep its purchasing power over a retirement that may run three decades. Working that out requires knowing what you spend, what income you have coming from outside the portfolio, and which parts of your wealth you genuinely need versus which parts are really for somebody else. That is a planning question, not an investment product question, and it is worth answering properly before you touch the settings.

Book a quick Wealth Planning Consultation and we’ll help you see where you stand, what’s possible, and how to make it happen.

• Stop feeling uncertain about your financial future
• You won’t need to make big sacrifices
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About the Author: Ethan Stein is a financial planner with expertise in investment structuring, superannuation strategy, shares, property investment and other planning strategies. This article reflects general financial commentary only and does not constitute personal financial advice.

Financial Disclaimer: The information provided in this article is for general knowledge and informational purposes only and does not constitute financial advice. Individual circumstances vary significantly. It is essential to consult with a qualified and licensed financial planner before making investment decisions. Past performance of any asset class is not indicative of future results.