As retirement approaches, many people begin to look at their portfolios a little differently. What once felt like a comfortable level of risk in your 40s or 50s may feel far less comfortable when you’re on the doorstep of retirement. One question I often hear is: Could a market downturn derail my retirement plans?
Back in January, we provided a “monthly financial to-do list.” So here we are in May – an ideal time to revisit your investment risk and determine whether it still aligns with your timeline, income needs and long-term goals.
What Is Market Risk?
The Federal Reserve defines it as follows:
“Market risk encompasses the risk of financial loss resulting from movements in market prices. Market risk is rated based upon, but not limited to, an assessment of the following evaluation factors”:
The sensitivity of the financial institution's earnings or the economic value of its capital to adverse changes in interest rates, foreign exchanges rates, commodity prices, or equity prices.
The ability of management to identify, measure, monitor, and control exposure to market risk, given the institution's size, complexity, and risk profile.
The nature and complexity of interest rate risk exposure arising from nontrading positions.
Where appropriate, the nature and complexity of market risk exposure arising from trading and foreign operations.
Let’s simplify that: Market risk is the possibility of an investor or financial institution experiencing losses due to factors that affect the overall performance of financial markets. These can include economic slowdowns, interest rate changes, geopolitical events or shifts in investor sentiment. While market fluctuations are a normal part of investing, their impact on your retirement can vary depending on when they occur and how your portfolio is structured.
Portfolios don’t automatically adjust as retirement nears. Many investors who set up their allocations years ago simply stay the course without revisiting whether that level of exposure still makes sense. If a downturn happens early in retirement — perhaps when you’re beginning to draw income — it can create added pressure on your portfolio that may be difficult to recover from.
Market Risk Indicators
It’s important to understand not just how much risk you think you’re taking, but how much risk you’re actually exposed to. Here are five key market risk indicators to keep an eye on and what they could mean for your retirement income:
Stock market volatility: Larger and more frequent swings in the market may indicate uncertainty. For retirees, this can translate into fluctuating portfolio values and potential stress when withdrawals are needed.
Interest rate changes: Rising rates can impact both stocks and bonds. For those relying on fixed income investments, this may affect the value of existing holdings and future income opportunities.
Sequence of returns risk: Experiencing negative returns early in retirement, while taking withdrawals, can have a disproportionate impact on how long your assets last.
Inflation trends: Higher inflation can reduce purchasing power over time. Even moderate increases can affect how far your retirement income stretches.
Asset allocation imbalance: A portfolio that has become more heavily weighted toward equities over time may carry more risk than originally intended, especially if it hasn’t been rebalanced.
The goal isn’t to eliminate risk entirely — that’s neither practical nor necessarily beneficial. Instead, it’s about aligning your portfolio with your current stage of life. That might include reviewing your allocation, considering how you plan to generate income and evaluating whether your strategy accounts for different market environments.
What should you do?
Schedule an appointment with me so we can discuss your portfolio. With tax season behind us and summer vacation on the horizon, now is a good time to make adjustments, especially if retirement planning has been on your mind or is inching closer.
Retirement should be a time for you to thrive, not just survive, in every aspect of your life. We’d like nothing more than to help guide you towards robust financial wellness so the retirement you’ve worked so hard to enjoy meets or even exceeds your hopes and dreams.
You can reach me, Joe Duffey, at 859-291-9290 or jdduffey@everestfinancial.net. Learn more at everestfinancial.net or visit our office at 305 Artillery Park Drive in Fort Mitchell, KY.