Invest Retirement

How To Reset Your Retirement Risk Without Derailing Your Long-Term Investment Strategy 

Jean Chatzky  |  December 17, 2020

Investors are getting more risk averse, but a shift in risk tolerance doesn't have to throw your long-term investment plans out of whack.  

The stock market may rally despite COVID, but that doesn’t mean volatile times aren’t still on the horizon for 2021. Even though vaccines have arrived,  uncertainty surrounding the impact a worsening pandemic could have on the economy is causing investors to get more cautious. They’re reigning in their risk and resetting their retirement planning. This is particularly true of individuals nearing retirement who all too clearly remember the steep losses suffered during the Great Recession. 

“Regardless of the fact markets have recovered and are doing well, volatility is still here,” says Cyrus Bamji, head of communications at the Alliance for Lifetime Income, a non-profit focused on educating investors about the need for protected lifetime income. “Because of that, there is a dramatic shift in risk tolerance and a flight to safety.” 

Based on a recent survey of Americans approaching retirement, the Alliance for Lifetime Income found one in four investors lowered their risk tolerance due to the pandemic. Another survey showed the percentage of households with a pension or annuity hit 40% in 2020, up from 37% a year ago — an increase of 3.1 million households. 

Not surprisingly, many of the investors who are more risk averse are the ones who have retirement in their sights in the next five to ten years. They can ill afford to make costly mistakes that could erase some of their retirement savings. “Investors that are closer to their financial goals, be it retirement or sending a loved one to college, are the ones asking questions about removing risk and adding more protection into their plans,” says Leanna Devinney, VP branch leader at Fidelity Investments. “Investors who have longer to their goals are more comfortable staying disciplined and invested.”


While the pandemic has caused untold pain, it also presents an opportunity for investors to take a stock of where they are and where they want to be. With the exception of a severe March pullback, stocks have been on a tear for more than a decade, the longest ever. Even during COVID, the market has held up.  The stock market’s resilience in recent years gave investors confidence, which led some of them to push their risk tolerance beyond their comfort zone.  Now may be the time to reign it in.

“It’s a great time to have the conversation about what is your risk appetite,” says Jody D’Agostini, a financial advisor with Equitable Advisors. “People had been getting more and more risky. They didn’t want to lose an opportunity for upside, when really they might not have had that risk tolerance to begin with.”

Life has changed a lot since the pandemic hit US shores. Long-term plans and goals have shifted. People who may have planned for a retirement traveling the world are now opting for a simpler life. Others are worried about their health, job security, and whether they’ll have enough money to last through retirement. “Anytime you go through something that is traumatic, it’s good to take a gut check. What has changed in my life circumstances? Take stock of where you are right now, and where you are on your path,” says D’Agostini. 


If you are among the investors whose portfolio has gotten too risky, or if the volatility in the stock market is keeping you up at night, there are ways to reduce your risk without throwing your entire investment plan off track. The last thing you want to do is get too conservative and damage your ability to reach your long-term goals. 

The key to balancing your need for less risk with the opportunity cost you’re losing is to dial back without losing sight of your original financial plan. That starts by understanding your time horizon and how that impacts risk. “If you have ten plus years (before retirement) that’s a far different conversation than if you need your money in 12 months or less,” says Amy Richardson, CFP and Schwab Intelligent Portfolios Premium Planner. In that scenario, it pays to get much more conservative, looking at increasing your cash allocation as a hedge. If you have three-to-seven-years, Richardson says you can dial back your risk by pairing down equity exposure and increasing your fixed income investments. The closer you get to your time horizon, the more conservative you become. It’s much better than moving to all cash in a panic. “Time in the market is far more beneficial for investors than timing the market,” says Richardson. 


During times of peril, risk-averse investors seek out safety, and annuities have long been a popular choice. This was true during the Great Recession, and is true again now 

Annuities are insurance contracts that make regular cash payments to you now or in the future. There are lifetime annuities and ones that last a set amount of time.   There are others that you buy today but don’t tap for years, providing an extra stream of income down the road (this is often called longevity insurance.) Through annuities, investors get retirement savings protection and guaranteed income. 

Their popularity today is being helped by the poor performance of bonds, which have traditionally been a safe haven. Bonds aren’t yielding much of a return now, given the Federal Reserve’s move to keep interest rates near zero. Annuities are a compelling alternative — they protect them from loss of principal, and offer returns that are beating bonds right now, says Bamji. 

The biggest benefit of annuities is likely peace of mind, which, according to the study from the Alliance for Lifetime Income, helps people feel more comfortable taking on risk in other aspects of their investment portfolio… When people know they aren’t going “lose it all” in the stock market because at least one part of their portfolio is guaranteed, they’re much less likely to panic and react emotionally when the markets dip. 

“When people know they have a source of guaranteed income that is able to cover their essentials, their risk tolerance for the rest of their retirement savings increases regardless of what’s happening in the market,” says Bamji. “When volatility strikes, those who have an annuity won’t touch their portfolio, or they’ll see buying opportunities when stocks are low.”


SUBSCRIBE: Learn more about getting the most out of your retirement, and join the judgment-free zone. Subscribe to HerMoney today!

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

Next Article: