More than 55% of Americans approaching retirement say they plan to work after retiring. For some, it's a matter of staying active, but for 35% of these older adults, working is how they plan to pay bills. 

Almost everyone who doesn't expect to work says they're going to self-fund their retirements. That could be a problem, though, since the median retirement balance for Americans aged 55-64 is just $89,716. 

America's retirement system offers big opportunities but equally large risks. With defined-benefit pensions having largely disappeared, retired citizens are relying on investments from Roth IRAs and 401(k)s to fund their later years. Consequently, if the market goes the wrong way at the wrong time, you could stand to lose big. 

When you’re young you have the time to make up for those losses. When you're approaching retirement, however, your recovery window is much smaller.

What can you do to stay out of the retirement risk zone?

Understanding Retirement Risk Zone

The retirement risk zone refers to the critical phase of your financial journey, typically 5-10 years around retirement when the potential for financial loss becomes increasingly significant. During this phase, it can be is essential to understand the unique challenges and risks you may face and take proactive steps to help protect your hard-earned savings.

Several factors contribute to increased risk during the retirement risk zone. First, market volatility becomes more daunting as you have less time to recover from the ups and downs of the market. Additionally, the need for income stability becomes paramount as you transition from relying on a steady paycheck to living off your investments and retirement savings.

To stay safe in the retirement risk zone often means evaluating your investment strategy as you get closer to leaving the workforce. This may involve gradually shifting from more volatile assets like equities to safer options, such as fixed-income and bonds. These asset classes can provide a steady stream of income and are generally less susceptible to market fluctuations, offering greater stability during your retirement years.

Evaluating Risk Tolerance and Goals

As you approach retirement, it's important to evaluate your personal risk tolerance and define your retirement goals and income needs. 

How to Evaluate Your Risk Tolerance

Many online sites offer risk tolerance assessment calculators. These tools can be fun and sometimes useful starting points to help you gauge your comfort level with risk. 

Truly evaluating your risk tolerance, however, means understanding how much risk you can manage emotionally as well as how much risk you can absorb financially. A wealth management advisor can help you evaluate both your feelings and your finances as you consider these concerns.

Defining Your Retirement Goals and Income Needs

How much money will you need in retirement? Once upon a time, a million dollars was considered enough to keep you safe, but times have changed and research from USA Today says the average American will spend $987,000 throughout their retirement. Over time inflation will drive up that number, meaning a million dollars may soon will provide a less-than-average retirement experience.

It may be best not to fix your focus on a single number. To be content in retirement, it's likely more important to know what you plan to do with your retired years. When planning for their post-work life, many people divide their retirement into three phases — early retirement, middle retirement, and late retirement. 

Early retirement is often filled with family, volunteer work, travel, and completing the bucket list. Middle retirement is usually quieter and focused on activities close to home. Late retirement may mean aging in place, a senior living community, or a long-term care option. Knowing your goals and expenses for each phase of your retirement can tell you how much you'll need and when you'll need it.

You may be more risk-averse in late retirement than you were in the early part of your retirement - or vice versa. 

Considering Individual Circumstances and Time Horizons

Knowing what the "average American" saves, spends, or needs in retirement can be helpful, but it's not an ideal target. You need to consider what you personally plan to do with your retired years. What do you want to spend, give, or save? Where do you plan on living? How long do you expect that you will live in retirement?

Talk to your financial advisor about how to turn general advice for risk tolerance and retirement investing into a tailored plan designed just for you.   

The Benefits and Drawbacks of Equity Investments in Retirement

Equity investments, also known as stocks, have the potential to provide retirees with high returns on their investments. However, with high returns comes high risk. The individual business risk of a company and the volatility of the stock market can lead to significant losses in a short amount of time, making it a riskier investment option for those nearing retirement age.

One of the benefits of equity investments in retirement is the potential for long-term growth. Stocks have historically outperformed other asset classes over the long run, making them a popular investment choice. Additionally, many retired Americans may need or prefer to maintain a certain level of exposure to equities To keep their portfolios diversified and help protect against future inflation or unforeseen events. 

However, equity investments can also come with drawbacks in retirement. Retirees who have a significant portion of their portfolio in equities may be forced to sell off assets during a market downturn, locking in losses and potentially disrupting their retirement income.

Transitioning to Fixed Income and Other Less Risky Asset Classes

As retirement approaches, many investors seek to reduce the risk in their investments by transitioning from stocks to fixed-income and other less risky asset classes. However, diversification among equities and fixed-income is often critical in retirement planning, as it can help balance your needs for growth and preservation in retirement. 

• Fixed-income investments, such as bonds, often provide a lower-risk option than stocks. These investments offer a predictable income stream and the potential for capital preservation. Investors can choose from a range of fixed-income investments, including government bonds, corporate bonds, and municipal bonds.

• Annuities or cash equivalents may also offer reduced risks in retirement. An annuity can provide a guaranteed income stream, while cash equivalents such as money market funds offer stability and liquidity.

Understanding More About Safe Haven Investments

Municipal bond funds, also known as "munis," are debt securities issued by state and local governments to finance various projects, such as building schools, highways, and water treatment facilities. One of the key benefits of muni bonds is that they are generally exempt from federal income tax, and in some cases, state and local taxes as well. This tax advantage can make them particularly appealing to retirees with significant assets seeking to minimize their tax burden in retirement.

Muni bond funds are relatively stable compared to equity investments. Municipal bonds are considered to be lower risk because they are backed by the taxing authority of the issuing government entity. This means that in most cases, they are less likely to default on their payments compared to corporate bonds. However, it’s important to note that municipal bonds can carry some level of credit risk, so investors should research the fund’s holdings before investing.

In addition to muni bond funds, other safe haven investments to consider include treasury bonds, certificates of deposit (CDs), and money market funds. Treasury bonds are issued by the U.S. government and are considered among the safest investments available. CDs are time deposits offered by banks that typically offer a fixed interest rate over a specific period. Money market funds are low-risk mutual funds that invest in short-term debt securities.

When investing in these safe haven options, it's important to consider factors such as interest rates, credit quality, and your specific investment goals. Consulting with a financial advisor can help you navigate these considerations and create a portfolio that aligns with your risk tolerance and retirement objectives.

Other Considerations for Risk Reduction

In addition to transitioning towards less risky asset classes, you can take several other important steps to reduce risks as you approach retirement.

1. Evaluate healthcare costs and long-term care insurance options. HealthView Services’ 2021 Retirement Healthcare Costs Data Report found that a healthy, 62-year-old couple can expect to spend $662,156 on healthcare costs. Medical expenses can significantly impact your retirement savings, so it's important to have a clear understanding of potential costs and how you’ll cover those costs.

2. Consider your Social Security claiming strategies. The age at which you claim Social Security benefits can have a major impact on your retirement income. It's important to carefully evaluate the best-claiming strategy for you and your spouse, considering factors such as your health, financial needs, and longevity expectations.

3. Maintain an emergency fund. Unexpected expenses can arise in retirement, such as major home repairs or medical emergencies. An emergency fund in place can provide peace of mind and help prevent the need to unexpectedly dip into your retirement savings to cover these costs.

4. Stay informed and adapt to changing economic conditions. The financial markets and economic landscape can be unpredictable, so it's important to regularly review your investments, understand market events, and make adjustments as needed. Working with a knowledgeable advisor can provide valuable guidance and help you navigate these changes.

Working With Your Retirement Plan Advisor

As you approach retirement, it can become increasingly important to seek guidance from a qualified retirement plan advisor. Working with an advisor offers numerous benefits and can greatly assist in taking the risk off the table.

Finding a qualified advisor who will work with you to understand your retirement plan is crucial. Look for professionals who specialize in retirement planning and possess the necessary certifications and experience. A trustworthy advisor will prioritize your best interests and offer objective advice. They will regularly evaluate your investments and recommend changes as needed, working to ensure that your risk level is appropriate for your stage in life.

Share your financial goals, concerns, and values with your advisor, allowing them to create a plan that aligns with your specific needs and desires. If you need a financial advisor in the Orange County area, contact us at Cooke Wealth Management. We'd love to talk with you.