Understanding portfolio risk (and how to plan for it)

Do you believe that your retirement portfolio will provide enough income to meet your needs? And if so, what are you doing to mitigate risk?

To help answer that question, let’s examine what portfolio risk really means. In the simplest terms, portfolio risk is the possibility that the actual returns from your investments turn out to be less than what you expected.

To plan better, here are a few questions to consider:

• 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 reduce 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 these well-known bumps that may intrude along your path to retirement.
 

Portfolio risk as you age and enter retirement

The risks facing your retirement portfolio can increase as you age, and your health and living situation changes. Longevity is a gift, but adds to the worry about potentially outliving your 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

Related: How much should you save for retirement? 

Others worry about the risk of high, unexpected healthcare costs. Even with the availability of Medicare, a 65-year-old couple could pay $315,000 over their retirement in Medicare premiums, copays and out-of-pocket costs.² In fact, about one in three retirees say they’ve made lifestyle concessions to afford health care in the past year, including borrowing money, delaying retirement and even skipping medications.³ To reduce these risks, consider Health Savings Accounts, Medicare Supplement insurance and long-term care insurance.

Our retirement expense & income calculator is one way you can uncover any gaps in your financial planning.  Input your unique factors, such as current income, retirement age, retirement state and more.
 

Personal risks that also impact your portfolio

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.

Even though inflation has cooled to the 90^th percental historically, it still affects retirees on fixed income.⁴ Put simply, every dollar withdrawn today buys less than it did a year ago. And that lost buying power compounds over the long term. Suddenly, healthcare, groceries, travel and more were eating into their budgets more than expected.
 

Strategies to mitigate your portfolio risk

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 reduce your susceptibility to stock market and global uncertainty, tax risks and more.

So, ask yourself two important questions:

1. Which risks can, or should, you accept?
2. How much risk can you live with?

There is no single right answer to these questions. Your answers will depend on your goals and circumstances, such as your age, years until retirement, health and other sources of income.

Consider strategies such as:

Diversifying your portfolio risk – what asset classes will best serve your needs, and when?

Investment risk tolerance – what level of risk are you comfortable with?

Financial risk capacity – how much financial risk can you absorb and still meet your budget and responsibilities?

These are crucial conversations 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.

And keep in mind that as those numbers change from year to year, so should your asset allocation mix. 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 likely pivot and invest more in bonds, which do a better job of preserving your savings as you get closer to retirement.
 

Have you considered these ways to help address portfolio risk?

Bonds aren’t the only conservative asset you’ll want to consider as you get closer to retirement. Annuities are another product that can provide reliable, protected retirement 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.

Ready to address your portfolio risk? Use this article as the starting point for a valuable conversation with your financial professional. Ask them how an annuity from Jackson may help you mitigate portfolio risk.