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Rethinking Retirement: Why “Just Take More Risk” Might Be Bad Advice

Let's talk about something that's been bugging me lately. If you've ever sat down with a financial advisor after realizing you're behind on retirement savings, you've probably heard some version of these three pieces of advice:

1. “You need to save more money”
2. “You might have to work a few more years”
3. “You should consider taking on more investment risk”

The first two suggestions? Yeah, they're pretty straightforward (even if they're not what we want to hear). But that third one about taking on more risk? That's where I think we need to pause and have a real conversation. Because this common advice might actually be undermining your retirement security rather than helping it.

When “Higher Risk” Doesn't Equal “Better Retirement”

I get it. When your retirement calculator is flashing red, the idea of boosting your returns through higher-risk investments sounds appealing. Higher risk traditionally means higher potential returns, right?

But here's what many advisors don't explain clearly: risk has a real cost, especially when you're in or approaching retirement.

Let me break this down with a simple example:

Imagine you've managed to save $1 million for retirement (congratulations!) and you need to withdraw $50,000 each year to cover your living expenses. That's a 5% withdrawal rate – already pushing the boundaries of what many experts recommend.

Now, what happens if the market takes a dive and your portfolio drops by 15%? Suddenly, your $1 million nest egg is worth $850,000. That same $50,000 withdrawal now represents nearly 6% of your portfolio – a rate that significantly increases your risk of running out of money.

You're faced with some tough choices: cut back on your lifestyle, withdraw more than is sustainable, or cross your fingers and hope the market bounces back quickly.

This isn't just a theoretical concern. It's the reality of what happens when volatility hits your portfolio during retirement. And this is precisely why “just take more risk” can be dangerous advice.

The Diminishing Returns of Risk

Here's something they don't teach you in Retirement Planning 101: As you increase portfolio risk, the potential for higher returns doesn't increase proportionally. There's a tipping point where taking on additional risk provides minimal benefit while significantly increasing your potential for losses.

If you're familiar with investment concepts, you might have heard of the “efficient frontier” – it's basically a fancy way of describing the optimal risk-return balance. Traditional advisors often focus on pushing you further along this frontier to chase higher returns.

But when you're regularly withdrawing money to live on, this approach can backfire spectacularly.

A Different Way of Thinking: The Case for Annuities

This brings me to what I consider a smarter approach to retirement planning: creating income certainty with annuities.

Instead of putting all your retirement eggs in the “market performance” basket, annuities offer something different – guaranteed income that continues regardless of what the stock market does.

Think about how your retirement might look with a combined strategy:

• Guaranteed income from annuities covering your essential expenses (housing, food, healthcare)
• Traditional portfolio withdrawals for discretionary spending and growth
• Social Security as an additional guaranteed income source

With this approach, you're creating both security and flexibility. Your basic needs are covered no matter what, while you still maintain growth potential in your portfolio.

 

“But Don't Annuities Offer Lower Returns?”

I hear this question all the time, and it misses a fundamental point: the goal of retirement income planning isn't necessarily to maximize returns – it's to create reliable, sustainable income that lasts throughout your retirement.

When you're 75 and the market drops 30%, you're not going to be comforted by knowing that historically, the market has always recovered. You need to pay your bills now.

By including annuities in your retirement strategy, you're essentially:

• Creating a buffer against market volatility for your essential income
• Establishing a foundation of predictable income you can count on
• Allowing your remaining investments to focus on long-term growth
• Protecting yourself from having to sell assets during market downturns

It's not about getting the highest possible return – it's about creating the most sustainable income with the least amount of stress.

Finding Your Personal Balance

So how much of your retirement savings should go toward guaranteed income sources like annuities? That depends on several factors:

• The size of your retirement savings
• Your expected expenses in retirement
• Your personal risk tolerance
• How much flexibility you want in your spending
• Your legacy goals (what you hope to leave behind)

A good starting point is to calculate your essential expenses – the things you absolutely need to cover each month. These basics are ideal candidates for guaranteed income sources. Your discretionary expenses (travel, hobbies, gifts) can then be funded through your investment portfolio, allowing for more flexibility.

The Hidden Benefits of Guaranteed Income

There's another advantage to guaranteed income that doesn't show up in the mathematical models: peace of mind.

When you know your essential expenses are covered no matter what, you:

• Feel less anxiety during market downturns
• Make more confident spending decisions
• Are less likely to make emotional investment choices
• Can more easily stick to your long-term financial plan

I've seen this firsthand with clients who sleep better at night knowing they have guaranteed income coming in each month, regardless of market conditions.

Beyond the Numbers

Creating an effective retirement income strategy isn't just about spreadsheets and calculations. It's about designing a plan that:

• Provides reliable income throughout your retirement years
• Reduces stress about market performance
• Allows you to maintain your desired lifestyle
• Protects against major risks to your retirement security

This is where the value of professional guidance comes in. A qualified financial advisor who specializes in retirement income planning can help you analyze your specific situation and create a strategy that balances guaranteed income with growth potential.

The Bottom Line

If someone tells you to “just take more risk” when your retirement savings aren't where they should be, I encourage you to push back. Ask them about the real costs of that risk and how it might impact your retirement income plan.

Remember that retirement planning isn't about maximizing returns – it's about creating sustainable, reliable income that supports your lifestyle throughout your retirement years. For many people, that means incorporating guaranteed income sources like annuities alongside traditional investments.

Whether you're approaching retirement or already enjoying your post-work years, consider how guaranteed income might fit into your overall plan. You don't need to eliminate investment risk entirely, but managing it effectively while creating income security can make all the difference in your retirement experience.