What is your portfolio risk?

April 26, 2024


Mitigating risk in your retirement portfolio

Retirement can be a risky business. Do you know if your retirement portfolio will provide enough income to meet your needs? 
 

What is your portfolio risk?

Portfolio risk is the possibility that the actual return from your total investment turns out to be less than what you expected and planned for. Questions to consider when thinking about your own portfolio risk include:

  • Will the market take a downturn leading up to your retirement date - when you can least afford it?
  • Will declining health – yours or a loved one’s – eat away at your resources?
  • Will inflation take away some of your purchasing power due to increases in pricing of goods and services?
  • Will you outlive your assets?

You can’t know exactly what’s ahead and how it will affect you, but you can help mitigate portfolio risk by preparing for any bumps that may intrude along your path to retirement.
 

Integrating personal risk with portfolio risk

Portfolio risks are those that affect you as you age, including those that concern your health and living situation. Longevity is a gift, but many people worry about outliving their retirement savings. And for good reason; the latest retirement statistics reveal that 32% of investors underpredict their lifespan, making them vulnerable to running out of retirement income.1 You can address this concern by delaying your retirement – and, in particular, your Social Security benefits – until age 70.

Others worry about the risk of high, unexpected healthcare costs; even with Medicare, a 65-year-old couple could pay $315,000 over their retirement in Medicare premiums, copays, and out-of-pocket costs.2 To reduce this risk, consider Health Savings Accounts, Medicare Supplement insurance, and long-term care insurance.

 

Our Retirement Expense & Income Calculator is another way for you to work with a financial professional to effectively project expenses in retirement using factors such as current income, retirement age, and retirement state. You can also calculate the gap between essential expenses and guaranteed income to discover potential solutions. 


Personal risks affect the money you need in retirement, and portfolio risks deal with the performance of your investments. It’s all tied together because one certainly has potential to affect the other.

For example, even though inflation has cooled for now, it reached a new 40-year high in June 2022.3 The argument can be made that this affected retirees on a fixed income more than the rest of the population. Suddenly, healthcare, groceries, travel, and more were eating into their budgets more than expected.

To mitigate this and other portfolio risks, your financial professional may suggest you consider diversifying* your investments with commodities such as real estate, floating-rate bonds, and Treasury inflation-protected securities. You’ll also want to discuss ways to mitigate stock market and global uncertainty, tax risks, and more.

With time, money, and effort, you can mitigate some but not all portfolio risks. So, which risks can, or should, you accept? How much risk can you live with? There is no single right answer to these questions. Your answers depend on your goals, on where they fall on Maslow’s Hierarchy, and on your circumstances, such as your age, years until retirement, health, and other sources of income.
 

Diversifying your portfolio risk

Do you know what your risk tolerance and risk capacity are? 
 

Risk tolerance

Risk tolerance refers to the amount of risk you can take until your anxiety kicks in and says, “No more!” It’s how much volatility you’re willing to endure in the value of your investments.
 

Risk capacity

Risk capacity, on the other hand, refers to the amount of risk you can actually handle financially. How many years can you draw on your retirement income to meet your monthly budget and expenses before it dries up? This is a conversation to have with your experienced, trusted financial professional. The more they know about your risk tolerance and capacity, the better they can propose retirement strategies with the right mix of assets for you.

That “mix” is a crucial concept, with broad applicability to financial planning. To balance risk and reward, for example, you can diversify your portfolio with a mix of investments that are collectively designed to preserve your capital, generate steady income, and enable growth. Your goals, risk tolerance, and capacity aren’t the only factors that help determine the mix that’s right for you. You’ll also want to consider your age and the number of years you have until retirement.

As those numbers change from year to year, so should your mix of assets – also called “asset allocation” – in your diversified portfolio. For example, in your youth, you can afford to invest mostly in stocks because their relatively high returns will grow your nest egg, while you have time to recover from periodic downturns in the market. As you age, you’ll want to invest more and more in bonds, which do a better job of preserving your savings as you get closer to retirement, albeit at the cost of slower appreciation.
 

Annuities to help address portfolio risk

Bonds aren’t the only relatively conservative asset you’ll want to pay increasing attention to as you get closer to retirement. Annuities are another retirement product that can provide reliable, protected income when you need it. They can help bridge the gap between your retirement savings and traditional sources of retirement income, such as Social Security.

Long-term care insurance, which we mentioned earlier, is another dependable source of income to address sudden needs for certain types of healthcare expenses that Medicare doesn’t cover.

Portfolio income insurance is another way to hedge your bets against a downturn in your portfolio’s value.

Want to learn more about portfolio risk and how you can prepare for it? Download a free copy of our white paper, Retirement planning is full of risks: Here’s how to manage them. It’s a great conversation starter for discussions with your financial professional.

 

Talk to your financial professional about your retirement goals and how an annuity may help you mitigate portfolio risk.

 

*Diversification does not assure a profit or protect against loss in a declining market.

Annuities are long-term, tax-deferred vehicles designed for retirement.  Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59 ½ unless an exception to the tax is met. 

Add-on benefits that provide income for the length of the designated life and/or lives may be available for an additional charge.

1. Jackson in partnership with The Center for Retirement Research,"Research, Analysis, and Insights on Addressing Longevity Risk,” November 2023.

2. Stephanie Dhue and Sharon Epperson, cnbc.com, "Americans can expect to pay a lot more for medical care in retirement," May 16, 2022.

3. Christopher Rugaber, Associated Press, “US inflation surges again in June, raising risks for economy,” July 13, 2022.

Jackson, its distributors, and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Tax laws are complicated and subject to change. Tax results may depend on each taxpayer’s individual set of facts and circumstances. Clients should rely on their own independent advisors as to any tax, accounting, or legal statements made herein.

Guarantees are backed by the claims-paying ability of the issuing insurance company.

Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York).  Annuities are distributed by Jackson National Life Distributors LLC, member FINRA. These contracts have limitations and restrictions. Jackson issues other annuities with similar features, benefits, limitations, and charges. Contact Jackson for more information.

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