Are You Taking Too Little Risk in Retirement?
This article is for informational and educational purposes only and should not be considered personalized investment advice.
In retirement, people’s main concern typically is “Will I run out of money?” or “Will my money last me?”.
To mitigate this, people often take no risk to assure themselves of a successful retirement, when in reality, it could lead to the opposite outcome.
When most people think about retirement, they think “safety.” And that makes sense. After all, you've worked hard, saved diligently, and now it's time to protect what you’ve built, right?
But here’s the problem: playing it too safe with your investments can actually be one of the riskier things you do in retirement.
🚨 The Hidden Risks of Playing It “Too Safe”
Retirees often reduce or eliminate market exposure entirely, choosing bonds, CDs, or cash equivalents for peace of mind. While this may feel secure, there are three major risks to consider:
1. Inflation Risk
If your money isn’t growing faster than inflation (which runs at 2.5% - 3.0% annually), your purchasing power declines over time. What costs $100,000 today may cost $150,000 or more in 15 years. If your portfolio isn’t keeping pace, you could find yourself forced to cut back later in life.
2. Longevity Risk
We’re living longer than ever. A 65-year-old couple today has a nearly 50% chance that at least one spouse will live into their 90s. Underestimating your time horizon could lead to running out of money or having to become overly frugal in later years.
3. Opportunity Cost
Retirees who keep all their money in conservative investments may miss out on the long-term growth potential of equities for a portion of their money that they don’t need any time soon. Even modest exposure to a diversified portfolio of stocks can help to increase one’s retirement spending or provide more legacy gifting opportunities.
📊 How Much Risk Should You Take?
The right answer depends on several factors. Your desired retirement lifestyle, income sources, life expectancy, estate planning goals, tolerance for market volatility, etc.
But for many retirees, the answer isn’t “zero risk”—it’s strategic risk.
One of my favorite ways to think about the appropriate risk one should take in their portfolio is by matching your future income/ asset needs with their own investment strategy.
For example, one method of accomplishing this is with the “bucket strategy”:
Bucket #1 (Short-term): Cash and short-term reserves (1–2 years of your living expenses)
Bucket 2 (Intermediate): Conservative investments like bonds (next 3–5 years of expenses)
Bucket 3 (Long-term): Stocks and real estate investments for longer-term needs (7+ years in the future)
This strategy provides both immediate access to cash and short-term stability, so you always have funds available to meet your near-term income needs. Because Bucket #1 is designed to be shielded from market volatility, you won’t need to worry about pulling money from your portfolio during a downturn.
If we experience a prolonged market downturn, your conservative assets in Buckets 1 and 2 are there to carry you through without needing to touch your long-term growth investments. That gives Bucket #3 (the equity portion of your portfolio) time to recover without being prematurely tapped.
You recognize that stocks offer the strongest potential for long-term growth, and you’re comfortable knowing that you won’t need to rely on that portion of your portfolio for many years.
🧑🤝🧑 Case Study: Playing It Safe vs. Investing with Purpose
Let’s take a look at two hypothetical retirees—Barbara and David. Both retired at age 65 with $1 million in savings and modest Social Security benefits. The difference is that their investment philosophies and strategies are vastly different.
📉 Barbara: Ultra-Conservative Strategy
Barbara was nervous about market volatility. She remembered 2008 vividly and didn’t want to experience anything like that again. So, she put nearly all her retirement savings into:
CDs earning around 2–3%
A small portion in municipal bonds
The rest in a high-yield savings account
Her goal was to “never lose a dime.”
The result?
In the first 10 years, Barbara’s average return was under 3% annually. Meanwhile, inflation averaged closer to 3.5%. As prices crept up—groceries, insurance, healthcare—her savings lost purchasing power. By age 75, she had spent down nearly half of her portfolio and was starting to worry about whether it would last.
📈 David: Purpose-Driven Bucket Strategy
David took a different path. He still wanted stability, but he also understood the risks of inflation and longevity. So, he used a bucket strategy:
Bucket 1 (Cash): 2 years of expenses in a savings account
Bucket 2 (Income): 5 years of expenses in bond funds
Bucket 3 (Growth): The remaining funds in a diversified mix of stock ETFs and dividend-paying equities
When the market dipped, David didn’t panic, he simply drew from Bucket 1 and let Bucket 3 recover over time. His overall returns averaged closer to 5–6%, helping him preserve his purchasing power and feel more confident as retirement progressed.
By age 75, David had more money than when he started retirement, despite his spending each year, and felt financially secure even in a volatile market.
🔁 Why This Matters
Barbara's story is far more common than you might think. The desire to “keep things safe” can quietly erode wealth over time, especially when inflation and longevity aren’t factored in. David’s strategy wasn’t about chasing the higher rate of return, but rather matching the time horizon of his portfolio needs to a specific investment strategy.
This is the core of smart retirement planning: aligning your money with its purpose and timeline.
🔄 Reframing Risk: It's About Purpose, Not Fear
Risk shouldn’t be something you avoid, it should be something you manage with intention.
Are you taking enough risk to meet your goals? Or have you gone too far in the other direction and jeopardized your long-term financial independence?
A Closing Thought
If you’re unsure whether your current strategy strikes the right balance between protection and growth, it probably makes sense to get a second opinion. I find that a lot of retirees are surprised to learn they could be more confident, not less, by just slightly adjusting their approach and adopting a more coordinated investment approach.
Have any questions about what you’ve read? Let’s talk about them!
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