Investing Too Conservatively
The thought of losing wealth during retirement is scary, especially given that most of us will stop work¬ing. It follows that many people become risk-averse as they near retirement, which is understandable. But it’s not necessarily the best approach. In an extreme case, an investor might choose to shift a significant percentage of their retirement and portfolio into fixed income and cash. Investing in fixed income generally means lower volatility and somewhat more stable returns over time. But at the same time, it can also mean generating relatively low rates of return. As you can see from the table below, fixed income (navy boxes) and cash (purple boxes) are usually near the bottom of the performance spectrum each year.
J.P. Morgan Asset Management 1 In our view, retirees tend to underestimate how much growth they need in their portfolio over time, and we also see retirees underestimate how long they may live. Living longer and planning for rising costs throughout retirement – healthcare, inflation, etc. – both usually require long-term growth. And fixed income and cash may not be able to provide it. Key Takeaway It’s normal to feel like you want to “de-risk” as you approach or enter retirement. However, an excessively conservative approach could mean not meeting the long-term growth goals needed to finance all of your retirement needs. Being too conservative could also leave your nest egg vulnerable to inflation and other potential shortcomings of fixed-income assets.