If you’re like most investors, you’ve focused on making money for most of your financial life. But once you’re retired or close to retirement, I believe you need to shift gears, to put protection ahead of growth in order to make your savings last.
SEE ALSO: Is 4% Withdrawal Rate Still a Good Retirement Rule of Thumb?
In other words, I suggest you should only take as much risk as is necessary to accomplish your financial goals.
Calculate How Much Return You Really Need
Let's say you’ve done extremely well with your savings and investments over the years. You have $10 million in savings and live on $100,000 a year, so your cost of living is basically 1%. If you earned just 1% on your money, you’d never tap into your nest egg at all. I’d say you’ve won the game, and that you shouldn't risk that win. If you were the coach of a football team that was ahead by 10 points in the fourth quarter, would you tell your players to do anything that could cost you the game? I wouldn’t, and I’d say the same to an investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you have $10 million and only need a 1% return to support your lifestyle, I believe you should have no stock market risk. At that rate, you could probably put your money in a savings account and make enough to support your lifestyle.
It can be tempting to take a risk, especially when the market is bullish, but let me ask you this: If I could somehow guarantee you that a 2% rate of return would keep you financially secure for the rest of your life, would you take that rate — even if it didn’t beat the S&P? I think most people would take that deal and be really happy that they never had to worry about money again.
That’s why I believe that your retirement income is more important than the percentage return on your money.
What If You’re Not as Well Off?
But what if you only had $100,000 saved and you needed $10,000 a year to support your lifestyle? That would mean you needed a 10% rate of return. Would I advise you to chase a 10% return? No. I’d argue that that there’s no way to get that rate consistently.
Yes, the average annual return for the S&P 500 since its inception is 10%, but once you adjust for inflation, the average drops to around 7%. And there’s a bigger problem: That rate is an average from 1926 through 2018. The rate is nowhere as consistent in smaller increments of time. The average rate of return in 2007 was just 5.48% — and in 2008 it was -36.55%.
And to reiterate the point of this article: If you chase high returns, you are taking high risks. When you were working, you might have been able to cover some of your losses with your salary. But once you’re retired, you’re not just risking your nest egg: You’re risking income that helps to cover your cost of living. You’re running the risk of becoming poor.
See Also: How Can I Estimate the Income I'll Need in Retirement?
Two Options to Address Your Shortfall
Since attempting high returns is too risky, what can you do to make ends meet in retirement if your savings are falling short of your spending needs? Before you consider amping up your stock market risk to make up for the shortfall, first I’d suggest you take a hard look at your expenses instead.
Cost-cutting is difficult for most people. The term implies eliminating something you do—and probably do for enjoyment rather than necessity, or else it wouldn’t be on the table as a cost-cutting option. Instead, I advise people whose lifestyles outstrip their financial capabilities to reduce quantity. For example, I don’t suggest they stop playing golf, but cut back from playing from five days a week to playing three. If they’re eating out three times a week, I suggest they dine out once weekly.
It makes sense: If you want to lose weight, you don't stop eating, you just eat less. This “reduction in quantity” is the same sort of idea. If you manage quantity, the expenses will take care of themselves.
And if cost cutting doesn’t get you far enough? Well, there’s another thing you may need to do: Consider working longer, or, if you’re already retired, go back to work.
A Different Way to Think About Retirement
If you think my version of financial planning for retirement looks more like cash flow analysis than a typical investment plan, you’d be right. My job as a financial adviser is to help my clients’ money last as long as they do. I think that’s your job as an investor, too. And I think the best way to do that is to take only as much risk as you need to support your standard of living.
See Also: Want a Second Passport? Here Are 3 Countries You Can Buy Your Way Into the EU
-
AI vs the Stock Market: How Did Alphabet, Nike and Industrial Stocks Perform in June?AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in June.
-
Stock Market Today: A Historic Quarter Closes on High Notes"All's well that ends well" is one way to describe the second quarter of 2025, at least from a pure price-action perspective.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the FairwayThink of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty MovesIf you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
