How “Safe” is Too Safe For Your Retirement Portfolio?

Many of us know people who needed to continue working into retirement in the wake of the 2008 financial crisis. There are benefits and risks to having a diversified investment portfolio, but it would be helpful to know what’s too risky—and what’s too safe.

In order to better understand what makes a portfolio safe in the first place is to understand what kinds of risks exist. There are risks across the board, but some kinds of investments carry much more. There are short term and long term risks, but the argument is that long term risks looms the largest. This is because the ultimate goal is to be able to draw on your retirement accounts in your retirement and expect that they actually cover your living expenses. Some investments, like cash and bonds, will not grow very much, and are likely not to hedge against inflation.

For your retirement portfolio to really serve you, you should also consider what other income sources you have (or will have). For example, your Social Security or pensions will only hedge against inflation but so much. You need the rest of your portfolio to do that work for you and ensure a comfortable retirement by taking on risks that will leverage the most growth over time—all while keeping some conservative investments!

Too safe means it is not going to be able to keep up with your standard of living in the future. The biggest risk is often not the short term ups and downs but rather that inflation will increase too much, hurting our ability to keep up with expenses down the road.

Key Points:

1. Stocks are traditionally considered risky and bonds are considered safe as you approach retirement.
2. Consider the true risks you face in retirement.
   • All cash or all bonds are relatively safe in the short term.
     • The risk is that there may not be much growth in the long-term.
   • Are you increasing your purchasing power over time?
     • Do this by buying stocks — but not too many.
     • Stock returns and behavior need to be viewed in the long-term.
   • Daily returns for stocks are divided pretty equally between positive and negative.
     • As time progresses, your stocks are more likely to grow.
     • The consistency of positive returns begins to become pretty incredible.
   • Bonds are revealed to be relatively risky over time with regard to purchasing power.
3. Your portfolio is too safe if it won’t be able to meet your needs in later years.
   • If it won’t meet your retirement needs in 30 years, it’s too safe.
   • The more money you have in your portfolio, the more flexibility you have.
   • Consider your other income sources (and whether they are inflation resistant).
     • Pensions don’t have a cost of living adjustments, typically.
     • Social security has some built-in inflation protection, but it’s not fully protected.
4. Make sure that some of your money is invested for growth.
   • Try the “buckets” method.
     • One bucket is dedicated to conservative investments.
     • Another is dedicated to more aggressive investments.
     • Consider how much of your living expenses will be covered.
     • Spread out or diversify your portfolio across lots of different things.
       • A common example is 60/40, or 60% into things that grow (aggressive and high risk), and 40% into things that will hold stable (conservative and low risk).
       • This will allow you to draw on accounts without necessarily having to sell your big investments.

Timestamps:

0:35 — Intro of today’s topic.

2:23 — What is risk, really?

4:18 — Relative risks of different kinds of investments.

8:00 — Purchasing power of bonds.

9:15 — The “too safe” portfolio.

14:00 — Tips about how to invest safely and aggressively at the same time.

18:00 — Applying these tips to your own retirement plan.