In the financial world, we are always dealing with this question. Some would encourage you to take no risk, but if you are saving for retirement to supplement your Social Security income, taking no risk will leave you with a small retirement account.
Many times, avoiding risk completely means losing money as well. It’s just slower because the no-risk return will often be less than the inflation rate, which means you are still losing. If you are younger, with many years until retirement, you can take more risks; but if you have already done an excellent job saving for retirement, and you are only a few years away, it makes sense to reduce your risk to preserve what you have.
Sometimes, older people think they need to take a great deal of risk with their retirement account because they only have a few years and need to make all they can. The problem is a single downturn in the market just before retirement could make your golden years income significantly less.
Consider the S&P 500 for the last three decades. Over that period, the return has been negative eight times, flat once, and up for the remaining 21 years. If only one of those particularly bad negative years lands near your retirement date, it could impact your income in retirement.
Younger people can take more risk because they have more time to “ride out” the negative years. When market returns go down 20%, it takes a 25% positive return just to get back where you were. Some would protest that anytime the market is negative, it usually returns the following year with a good return to offset the loss. This is not always true. In 2000, 2001, and 2002, the S&P 500 was negative for three years in a row, and this has occurred at other times in the market’s long history.
Risk is also something we must manage in retirement. When you reach a point when you are required to make withdrawals from your account, you must consider you will need income for potentially 30 years or more. Therefore, while you can’t be too risky, you also can’t be too conservative.
Either way, it is a risk. If you are too conservative, you will run out of money before you die; but if you take too much risk, you could lose too much, and what’s left will not last to the end of your life. If this is not an area you have studied throughout your life, perhaps you need professional help. If so, contact either Richland Ave Financial (formerly Free Will Baptist Board of Retirement) or Free Will Baptist Foundation.
About the Columnist: David Brown is director of Free Will Baptist Foundation. To learn more,
visit www.fwbgifts.com.
