Are You Taking Too Much Risk in Retirement?

Use a two-bucket plan, with a protection bucket and a growth bucket, to protect your nest egg from market volatility so it lasts as long as you need it to.

A quarter sits on the thumb of a man who's about to flip it.
(Image credit: Getty Images)

Everyone knows that most retirees’ biggest fear is running out of money. We typically find that, if someone has saved $1 million, they want $2 million, and if they have saved $2 million, then they want $4 million. Everyone seems to worry about it.

A reason this is a big concern is because of market volatility. This is when your investments, or the money you have worked hard to save over the years to provide for your retirement, loses value. A prime example of this that everyone remembers was the financial crisis in 2008. During this time, the market was down more than 50%. A running joke was that 401(k) accounts had become 201(k)s.

Many people who retired during this time had to go back to work if they had not planned the right way. Imagine that: You work 30 to 40 years to get to retirement and are ready to pull the trigger, and then all of a sudden, something you cannot control changes your plan. Well, I would argue that you do have control over something like that. Although you cannot prevent the market from going down, you can prevent your investments from going down by having what we call a “retirement income plan.”

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Mitigating risk and maximizing return

Our philosophy for a retirement income plan is to find that perfect investment that generates a 100% return each year with no risk! As we know, that investment does not exist. Because of that, we need to structure a plan to mitigate risk and maximize return so we can avoid running out of money.

We think of it as a bucket plan with two buckets:

  • The protection bucket is the bucket you go to if you need money in the next five to 10 years. This money needs to be protected from the market, but it also needs to grow enough to keep pace with inflation.
  • The growth bucket is for the money you do not need for 10 or more years. It is okay to take risks with the money in the growth bucket, and we would encourage most of our clients to seek risk in the stock market, as that will most likely provide higher growth potential to keep up with inflation over time.

If you do not need the money for at least 10 years, then you can buy time with the protection bucket and let the growth bucket rebound after a down market.

This bucket plan is a simple concept, but many people do not do it and expose themselves to sequence of returns risk. This is the risk of you retiring during a down market. We like the bucket plan concept because it helps protect you from this risk and what we call “the fragile decade.” This is the period five years before and five years after you retire. If the market goes down during this period, then your investment portfolio will face stress.

You could face a double loss at this time — the loss from you taking out money that is no longer available to grow and the loss of value in your portfolio. Then the question is: Do you have enough time to make up for those two losses? You are now in a different stage of life. You are in the distribution phase, rather than the accumulation phase.

In the accumulation phase, you are less worried about the market going down. When it does go down, you may see it as an opportunity to “buy low.” In retirement, that changes because now you need your money to live on.

A lot of people take on too much risk

We see many people in retirement taking on way more risk than they need to. Let’s use a football analogy. If you have done your job up to this point, then you are now on the six-yard line and winning the game with two minutes left. Should you throw a pass or run the ball and win the game? Same goes with your investments. Do you still need those consistent double-digit returns? Or would the double-digit losses be more costly?

To help us answer this question, we determine a risk score for each of our clients. I will share an example of a guy who came to us a year after he retired. He had just moved his $1 million 401(k) to an IRA with the same financial adviser with whom he started working 20 years ago. That adviser had made no changes while the client was shifting from the accumulation phase to the distribution phase.

I asked the client his risk score on the scale of 0 to 100, and he said 40, which I would agree was in line with his goals and situation. However, his risk score came back as a 95! He was in all equities except for his emergency fund at the bank.

Don’t bet your retirement on a coin flip

In 2022, I asked him how he felt when the stock was down nearly 20%. That meant he lost $200,000 in just one year. He was certainly worried and since then has been considering going back to work in case something like that happens again.

We also stress-tested his portfolio to see how it would have held up in 2008, and it would have lost nearly 40%, which meant his $1 million would have been $600,000! Nearly half of his investment would have been lost. After 40 years of working and saving for retirement, he would have to change plans if something like that happened again.

After seeing this and meeting with us, he said, “I do not want to bet my retirement on a coin flip. Let’s get a retirement income plan in place.” I told him, “I agree. You have done well all your life up to this point. You no longer need more money; you have already won the game. You are up 10 points with five minutes left, so you don’t need to throw Hail Mary touchdown passes. You just need to run the ball, finish the game and win.”

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Joe F. Schmitz Jr., CFP®, ChFC®
Founder and CEO, Peak Retirement Planning

As Founder and CEO of Peak Retirement Planning, Inc., Joe Schmitz Jr. has built a comprehensive retirement planning company focused on helping clients grow and preserve their wealth. Under Joe’s leadership, a team of experienced financial advisers use tax-efficient strategies, investment management, income planning and proactive health care planning to help clients feel confident in their financial future — and the legacy they leave behind. Joe has also written a book, titled I HATE TAXES. You can find Joe on YouTube, where he creates educational videos for those in or near retirement. If you would like to talk to Joe’s team, you can schedule a meeting.