Why Playing It Safe in Retirement Is a Big Risk

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Tariffs, rising inflation, stock market volatility, oh my…and that’s just this year.

It's understandable to get more conservative with your investments the closer you are to retirement or if you're already there. After all, the money has to last decades. Plus, you worked hard amassing your nest egg, so who can blame you for wanting to protect it!

It’s why conservative portfolio constructions — such as 40% stocks, 60% fixed income — exist, or why annuity sales in the third quarter alone reached nearly $120 billion.

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People don’t want to outlive their money, nor do they want to lose sleep worrying about what’s happening in the stock market.

Peace of mind for a price

But safety comes at a cost. Sometimes that conservative nature can cause more harm than good, even in volatile times.

Just ask all the investors who went to cash when stocks tumbled during the Great Recession, the COVID-19 pandemic and the bear market of 2022. By bailing out when the market was down, they lost out on the recoveries and bull runs that followed.

It’s not just the prospect of missed returns that hurts overly conservative investors, especially retirees. It’s the risk that their investments won’t keep up with inflation, putting them at risk of outliving their money in retirement.

And if that isn’t scary enough, what if you didn’t even know your portfolio had gotten too conservative? After all, many of us set up our asset allocation and forget about it, especially if all of our money is tied up in our 401(k) or we don’t have a financial adviser.

The good news is there are telltale signs your retirement portfolio is too conservative, and even better, some strategies you can employ to fix it. Read on to learn what they are and what you can do.

The “safe” cash pile isn’t so safe

Cash is not king in retirement. Sure, it’s nice to have some on hand, but having too much of it is a concern.

“Anytime you're keeping dry powder for some future event, it’s a big red flag,” says Jamie Hopkins, CEO of Bryn Mawr Trust Advisors. “A lot of people are holding this cash waiting for the tariffs to be over to get back in the market. You get returns in the market when you manage through the risk and volatility.”

Hopkins says you're better off buying when a stock is down and holding it for the long term. Even when you retire, a stock will still have years to recoup its losses.

Missing the market’s strongest days

The S&P 500, Nasdaq, and Dow Jones Industrial Average each set record highs in the past three years, and 2025 is shaping up to be another one for the books.

That’s great news for stock investors, but not so much for their more conservative counterparts, who have steered clear of stocks, favoring cash, bonds, treasuries and CDs, which all had lower returns.

Consider if $100,000 had been invested over twenty years through the end of 2024. If it had been invested in bonds, it would have appreciated to around $185,000, says Eric Diton, president and managing director of The Wealth Alliance. In a large-cap core stock, it would have appreciated to roughly $844,000. A big difference.

“The idea is to find assets that don’t all do the same thing at the same time,” said Diton. “If you plant a garden, you don’t want everything to bloom at the same time and die at the same time. It’s the same thing with investing. You try to diversify into different asset classes.”

When inflation eats your retirement

If inflation is running at 3% and your investment returns aren’t, that’s a doozy of a sign your portfolio is too conservative, both Hopkins and Diton said. If you don’t change your lifestyle or your asset allocation, you're likely to run out of money in retirement.

“If you had $100,000 and 3% inflation, over 25 years, that $100,000 buys you about $47,760,” said Diton. “You lost over half your purchasing power.” What about 8% inflation, which occurred after the pandemic? You would lose about 85% of your purchasing power."

Now that you know the signs, it's time for a calculated shift

Understanding that you've been playing it too safe in your approach to investing and retirement is important. But recognizing that you've been too conservative is not enough. You may need to use that knowledge to make some changes. Here are a few good options for what to do.

Stop guessing and get diversified

The best way to ensure you aren't overly conservative is to make sure your investments are diversified, and the only way you'll know is by reviewing your portfolio. What better time than the end of the year to do that?

If you haven't worked with a financial adviser, it may be time to consider doing so. It will cost some money, but if it prevents you from having an overly conservative portfolio, it may be worth it.

If not, here are some of the signs your portfolio isn’t diversified:

-Your money is invested in fewer than ten stocks

-Your asset allocation is heavily weighted in one area, say, bonds

-Your portfolio moves up or down on specific news. For example, Nvidia misses earnings, and your entire portfolio tanks.

-All the funds in your portfolio have overlapping investments

-There’s no international exposure

-Most of the investments are in one sector or industry.

Create a comfortable cash "safety floor"

One way to have the best of both worlds — peace of mind while staying invested — is to create a withdrawal strategy once you are in retirement.

This is a plan for how you’ll spend your money, taking into account inflation, longevity and ideally, unexpected health care expenses. The idea is to cover all of your expenses and leave the rest alone to continue to grow and compound.

There are several ways to do that. Hopkins points to flooring as one option. With this approach, you create a secure, guaranteed base of income that covers your monthly essentials, which typically include housing, health care, insurance, transportation, food, toiletries, and apparel, and the rest of the money can be invested.

“Once you understand what your essential expenses are and what you have in income, you’ll be much more willing to put discretionary spending at risk,” says Hopkins.

Future-proof your money with the bucket approach

Another way to ensure you stay properly invested is the bucket approach to retirement spending. With it, you put your retirement savings in three buckets: short-term, medium-term and long-term.

The first bucket of spending covers your short-term needs, the money that you’ll spend in the first one to four years of retirement.

The medium-term bucket is designed to provide a stable stream of income that can keep up with inflation and feed cash into the short-term bucket. That money covers years five through ten. Investments in this bucket tend to be less risky.

The long-term bucket is for growth during years ten through thirty. The money will be invested more aggressively in the stock market.“I’ve found bucketing or time segmentation is very helpful,” says Hopkins.

The best time to start is when you feel ready

Taking risks can be scary, especially when it comes to your life savings, but getting even slightly less conservative may be easier than you think, which is why baby steps are totally okay.

Baby steps might include a commitment to look over your portfolio this month, or a little shift in your asset allocation next month.

The good news is that just being aware you're too conservative and understanding the implications may be enough to get you to make a calculated move when you're ready.

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.