It may seem odd to think of your investment portfolio as a neglected area of retirement, but it can be for retirees who make this one key mistake: An overly-conservative asset allocation. This means primarily owning investments that may appear to be “low risk” but also have little to no potential for growth.
It’s an easy mistake to make, mainly because it seems like common sense. For example, let’s take a hypothetical retiree whom we’ll call J.Q. This person has worked hard, saved money, invested regularly, and as a result, was able to retire at age 67.
J.Q. knows that, despite having a sizeable nest egg, it’s always possible to outlive your money in retirement. He also wants to ensure he leaves something behind for his kids. So, he vows to be cautious, never take foolish risks with money, and avoid spending more than he has to. Accordingly, he adjusts his portfolio and invests primarily in, say, fixed annuities and long-term bonds. These types of investments aren’t as volatile as the stock market, so there’s less risk of losing his principal.
This all sounds prudent, right? That’s because, on the surface, it is. There’s nothing wrong with being cautious or careful.
For the first year or two, everything is fine. J.Q. is able to live primarily through his Social Security benefits.
But then, one day, the roof needs to get fixed.
A few months later, he has a health emergency — and then has a few more emergencies back-to-back the year after that.
Then there’s time one of his loved ones desperately needs money.
And the time he got into an accident on the interstate.
Suddenly, one day, J.Q. looks and discovers his principal is much lower than he wanted it to be. Not because he made bad decisions, or took risks, but because while he was busy living, his money was…well, doing nothing at all.
This is not an uncommon scenario. Many retirees adopt an extremely conservative portfolio in retirement. Again, it’s understandable why they do this: They don’t want to take on risk and see their retirement savings take a major hit.
But when this happens, instead of a major hit, we often have a series of minor ones that slowly sap our principal over time.
That’s why it’s so important not to just automatically move to an ultra-conservative asset allocation in retirement. It’s often necessary to devote at least a portion of our portfolio to assets that have the potential to grow, even if it means taking on slightly more risk.
You see, retirement isn’t about running out the clock, counting down the days, or watching the sand fall in the hourglass. Retirement is about living. Which is why your assets must continue to grow while you are busy living.
Now, there’s no one-size-fits-all approach to investing in retirement. Everyone’s needs and wants are different. What is universally true, however, is that we must avoid shoving our investment portfolio into the neglected corner of our financial house just because we think it’s “safe.”
Even in retirement, our investments are something to monitor, to prune, and to water…so that they can sustain us no matter what life throws our way.
