Ep. 277 – De-Risking Your Investment Portfolio as You Approach Retirement

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In this episode of the Secure Your Retirement Podcast, Radon and Murs discuss the crucial topic of de-risking your investment portfolio as you approach retirement. As you get closer to this significant life milestone, the question of whether to become more conservative with your investments becomes more pressing. Radon, Murs, and guest certified financial planner Nick Hymanson explore various strategies to manage and reduce risk, emphasizing the importance of a personalized approach to retirement planning.

Listen in to learn about different types of risks that can affect your retirement, including market risk, sequence of returns risk, and longevity risk. The hosts also delve into practical steps you can take to protect your retirement income and ensure your investments are aligned with your goals as you transition from working life to retirement. With real-life client stories, this episode provides valuable insights on how to safeguard your financial future.

In this episode, find out:

·      The importance of understanding and managing market risk as you approach retirement.

·      How to protect your retirement income through strategic investment planning.

·      The benefits of diversifying your investment strategies, including the use of structured notes and fixed income.

·      Why having a personalized de-risking plan is crucial for your financial peace of mind.

·      Common pitfalls to avoid when de-risking your portfolio, especially in times of market volatility.

Tweetable Quotes:

·      “De-risking your portfolio is not about eliminating risk completely; it’s about finding the right balance that aligns with your retirement goals.” — Radon Stancil

·      “A well-constructed retirement plan can help you navigate market risk, inflation, and longevity with greater confidence.” — Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Welcome everyone, to this episode of Secure Your Retirement podcast. We are excited today to have on with us an additional guest, another certified financial planner that works with us here at Peace of Mind Wealth Management, Nick Hymanson. Nick works a lot with our clients and the relationship side of things, really making sure that their plan is on track, and that he is working with them throughout that whole process. So there’s some things that we sit around and talk about as a team and we say, “Hey, this is something we could share with our audience.”
	And today, really, we’re talking about this idea of de-risking your retirement portfolio, especially as we get close to retirement. That’s a really big issue and really kind of around the line of, is it the right time to do it? And so this is something that we do, we meet every single week and we talk about what’s going on. What happened last week? What do we have coming up this week? And it gives us a nice opportunity to kind of understand what’s happening in our clients’ world. And I think that there was a couple of stories that actually made us create this particular episode today. And so Nick, why don’t you go first and share maybe a story about a client that made you go, “Hey, this might be a good topic for the podcast today.”
Nick Hymanson:	Yeah, yeah, absolutely. So, particularly this client, I’ll kind of set the scene. Ultimately, they’re about a year or two from retirement and throughout their entire working career, they have been 100% in equities. So essentially in the market, invested, pretty high risk. And so really over the last month or so, they came to me and they said, “I’ve been invested in the market. There was a major downturn here, but now I’m thinking differently because I’m very close to retirement. Something that I didn’t think of when I was five, 10 years out.” So when you get close to retirement, it becomes a real decision to make on, do I adjust my strategy? And what decisions do I make to essentially make yourself feel more comfortable and more secure in getting from working to retirement?
	So for example, in this case, if we see a 10% downturn in the market, which is very similar to what we saw over the last month or so, a million dollar portfolio can go essentially down to 900,000. And so in this example, just for easy numbers, the client’s coming to me and saying, “Hey, I went from a million to 900,000. Obviously I’m not spending any of that money yet because I’m still working, but now this is something that’s a concern for me.” So essentially, we went down the route of, how do we structure a portfolio specifically for retirement to take into account the risk? That’s essentially really, a main part of being 100% invested in equities in the market. And how do we adjust that to look at other alternatives? And we use what you’ve probably heard us before, the growth bucket and the safety bucket, to make adjustments to someone’s individual investment strategy. So we’ll provide more detail on that, but that was ultimately the setup of what we discussed in that meeting.
Murs Tariq:	Yeah, I’ve got another similar story as well. A longtime client of ours that I have been talking to for a little bit in our annual financial plan strategy meetings, as far as, “Hey, how are you feeling about risk?” They started with us as a younger client in their early 50s, today they’re approaching their 60s and retirement is on the horizon, not quite there yet. But when you have moments we had back in mid-July, end of July, where the markets fell five to eight to 10% in a short period of time, it makes people remember that, hey, the market’s not always good to us and there are issues and there are volatility.
	And so over the years I’ve been talking to them about starting to consider de-risking their portfolio. Well, it takes a moment like that a few weeks ago that says, “Hey, we know you’ve been talking about this and we believe now it is time, because we’ve just experienced it here a few weeks ago and we don’t feel like we want to experience that again. We’re getting to the point where we’re, we’ve got what we’ve got. We’ve got a few years left of saving ahead of us, but we’ve got what we’ve got and we got to protect that.”
	So I call it taking chips off the table, right? If you look back in the market years in the history here short term, 2019, a great market year, 2020, a pandemic year, but still a great market year. 2021, another great market year, we’re talking double digits. ’22 reminded people, it was a negative market year and a pretty tough one for a lot of people. 2022 reminded people that the market’s not always good to us. But then we had basically from January of ’23 all the way up until July of 2024, so you’re talking 18, 19 months of just another up market. So it’s easy to get swayed in that, the, hey, the market’s always going to be good to us.
	What we talk about with clients is that while yes, over time markets are going to perform, but as you approach something as big as retirement, we need to have measures in place to protect us, especially as we’re going to start withdrawing on our money. So naturally that conversation turned into, “Well, how do we de-risk our portfolio?” Them in particular, very equity heavy, and they’ve been comfortable with that for a period of time, but now they’re saying, “Well, what do we do? What do we do to de-risk and how does this all work?” Which I think is the story that we want to talk about today is, well, what do you do?
Radon Stancil:	Yeah, so thank you for the stories. I think that’s very beneficial. People can relate to, “Hey, this is not just happening to me.” So we’re just going to talk about this idea of risk a little bit, and kind of in a few different topics. One of those, the first one I want to talk about though is really this idea of understanding risk in retirement planning. What are some of the risks? Because there is equities and there’s portfolio risk, but there’s a lot of risks that we got to think about. So Nick, could you kind of run us through maybe some of the high level here behind, what are some of the different aspects of risk in retirement?
Nick Hymanson:	Yeah, so one obvious risk in retirement is market risk. So if all of your investments are tied to, for example, equities in the market or even bonds in the market, where bonds are more related to interest rate risk. But when we’re talking about market risk, you are kind of at the mercy of what happens to the market and the overall economy and how the market reacts to that. So that’s one main one that comes to mind when thinking about retirement, specifically when you are spending your investments in your assets that you’ve worked so hard to save.
	One other one is sequence of returns risk. So we have a lot of conversations on this, and what this is really related to is when you retire, the risk of having a few downturns or a few bad years early in your retirement where you are actually beginning to spend some of your savings. So compared to a scenario where the market just does really well right when you retire, those two scenarios can work very differently if your financial plan is really, really based on how the market is performing. So, those are two main ones. And so sequence of returns risk, we’re trying to essentially optimize the plan to make sure that we’re taking that into account, because no one really knows where the market’s going to go, but we want to at least have a plan so that we can really set it up to succeed, rather than just base the performance and the success of the plan on the market.
Radon Stancil:	All right. You see any more risks there, Murs, that I, just to make we cover that before we move on?
Murs Tariq:	Yeah, I think one that is rather in the forefront of everyone’s mind is inflation risk. We’ve been dealing with inflation since the pandemic and that’s just having to deal with rising costs and what your dollar can buy today versus 10 years from now. So how we tackle that risk is, we plan for it.
	Now, inflation over the last few years has been higher, well, very above average if you compare it to the last 100 years. But we do in our financial planning modeling, we do account for inflation. And it goes back to what Nick said about, a lot of these risks are hand in hand. If you build a well-constructed portfolio, you can manage market risk, you can manage sequence of return risk, and you can also manage inflation and longevity risk. Longevity risk is the risk of running out of money, it’s the fear that everyone has no matter how much money they have. And so with proper planning, we can have things in place so we’re not worried about those risks. They’re still there, but we can navigate them a lot better with proper planning.
Radon Stancil:	Yeah, I always think about risk too, this way. I always tell people the story about when a bad thing happens, a lot of times we’re more risk averse. I always talk about, if you were ever in a car wreck and after that car wreck, you probably have both hands on the steering wheel. You don’t even really play with the radio, definitely not going to pick up the cell phone. Six months goes by, you’re driving with one hand, you’re adjusting the radio. A year goes by, you’re driving with your knee, you’re eating a hamburger, and you’re on the cell phone. I mean, you’re doing everything because you’re far enough away from that danger that it’s just not a problem.
	And I think when we get close to retirement, we are way more careful about what’s going to happen to our portfolio. The risk of what that really means to us has a whole different meaning, kind of like if I were driving that car again and I had a child in the car. I hope I’m going to be a little bit more responsible because I’ve got something else there weighing. Same thing here, if I’m close to retirement, I’ve got more weight to that potential risk.
	Okay, so let’s talk about some strategies here, because we talk about, we have this risk, and we talked about this topic of de-risking. So, what are some strategies for de-risking? You want to start us off on that one, Murs?
Murs Tariq:	Yeah, so we talk a lot on how we educate clients and even you guys listening on the podcast today, we talk a lot about the combination of a growth bucket and a safety bucket. The growth bucket is the stock market and it carries risk, right? 2008, the markets were down, average investor lost 30 plus percent of their money. During the pandemic, the market fell for a period of time and it fell pretty significantly, around 34% in a very short period of time, right? That’s market risk. So the growth bucket is going to carry that.
	Now we, how we manage assets in the market, we have multiple strategies, which is one thing that helps de-risk. So we’re not just all-in on stock picking, we’re not just all-in on a certain mutual fund or a money manager or anything like that. We’ve got themes and we’ve got different strategies working together. So we’ve got diversification of assets, as well as diversification of strategies. And I talk about the core and the tactical and utilizing structured notes and fixed income all together, rather than just saying, “Hey, let’s buy 60% equities and 40% bonds,” like a lot of asset allocations end up being. So that’s the growth bucket is that, well, we can de-risk in the market, but you can only de-risk so much in the market and nobody’s perfect at that.
	That’s where we start to talk about the safety bucket as being a really good complement to the growth bucket or the stock market. And the key as to why it can be a really good complement is that it offers this one thing that really the stock market cannot, and it’s called principle protection. So our assets that go in there, we’re not really concerned about them going down if the market has a major downturn or a 2008 or a pandemic type scenario. We are protected for the assets that we put in there. So now we have even further diversification by utilizing these two different bucket strategies and all the different strategies within those buckets. And so we try to come to a way of, well, how do we divvy up into these different various buckets?
Radon Stancil:	Yeah, so one of the things that we talk about a lot with our clients is this idea, a whole other topic now, of really protecting our retirement income. And that’s why I like Murs bringing up that middle bucket or that income safety bucket, because that’s precious. So we always tell people, “If I had enough income, if you had enough income coming in to take care of all of your essential income needs and maybe a good chunk of your wants, if your growth bucket was down 10 or 15%, would you be that upset?” No, you wouldn’t be that worried. You wouldn’t like it, but you wouldn’t be that worried. Why? Because you’ve got all your money coming in that you need from that retirement.
	So Nick, could you just give us a high level overview here of what it really means? How do we protect our retirement income? What are some instruments we can use to do that?
Nick Hymanson:	Yeah, so ultimately, like Radon said, there’s a few different options, but specifically I’ll speak on the annuities for a second. Ultimately, we utilize many different fixed index annuities that provides the principle protection, but that also results in the opportunity for a good rate of return as well. So that is a lot of times based on the market, but what that does is also provide that the account could never lose any principle, so 100% protected.
	That also results in peace of mind when you’re looking for retirement income. You don’t have to worry about, hey, should I take this money out or should I continue taking from this account that’s down maybe with the market? So you can rely on the annuity because it won’t ever lose the money that you put into it. And it’ll also grow over time, assuming that the market’s growing and there’s interest credit to the account as well. So it provides that stable, really inflow of income that the money in the market really can’t provide for an extended period of time because we have to rely on growth in the market, where the annuity just can’t lose any money based on that. So that’s one of the things that we kind of plan for and utilize in the safety and income bucket.
Radon Stancil:	All right, now here’s the thing. Sometimes we get a little anxious about risk and we might go down a path that’s not really the best path in order to deal with this idea of de-risking. Sometimes because of fear we jump in and we say, “I got to go do something to handle this.” So Murs, could you kind of walk us through maybe some of the pitfalls that would come about if I do this just based on fear without really understanding a plan?
Murs Tariq:	Yeah, I think the most common thing that we come across today is, today your money markets, your CD rates, they’re the best they’ve been in a very, very long time. And so it’s easy to say, “Well, let me just put, let me just shift out of the market and into a money market that’s yielding me, given today’s rate, somewhere in the low fours at this point, 4% a year.” That’s a safe rate of return.” And my question back to that person is, “Okay, well it works for the short term and that’s okay, but what are you going to do next year when that money market rate drops down to three? What are you going to do the year after that when the money market rate drops down to two, and then one, and eventually that zero that we all know or remember from pre-pandemic times.” And so we know that is going to happen. So to me, over allocating to cash could be a major pitfall. And we’ve seen it this way.
	We’ve also seen it where someone got out of the market because they got spooked because of a pandemic type scenario or any major life-changing event or something that they felt really strong emotionally about, and they got out of the market and they say, “Hey, great, I avoided a 10% slide. I got out of the market. I did great.” And the problem with that one ended up being is that well, they never got back in and they missed out on the growth potential that the market inherently does provide over time.
	And so what I’m getting at here is that there’s always going to be pitfalls. There’s no perfect type of scenario, but I think having a well-balanced plan in a lot of different directions, a lot of different strategies, can avoid the stress. It can avoid the worry of, well, where do I pull my money from? It can pre-plan out a lot of the different things and be ready for the scenarios like we experienced in July and be ready for the major sell offs that are going to occur every five to seven years in the stock market, because we’ve got another place to tap into.
	And so pitfalls are pitfalls. Investing is not perfect, but we can come up with ways to balance things out, to make things smoother over time, because you do have to plan for a 30, hopefully 40-year retirement. And you want that money to last and you want to enjoy it, and so let’s not risk too much of it and let’s start to think about it a little bit more strategically.
Radon Stancil:	All right, so here’s the thing. We’ve talked about this idea of de-risking, we’ve talked about all these different topics. But the reality is sometimes people will say, “Hey, what should my risk factor be? What should it be? I’m X years of age old. I am going to retire here. What should it be?” And here’s the answer, it is not the same for everyone. It varies on your personal belief system.
	So we believe that everyone should have their very own customized de-risking plan. Now, what does that mean? Well, that means we’ve got to have a conversation. We got to talk about, how do you view risk? And we start that conversation off with quite honestly, how much at what point in the losing factor would you just say, “I’m stressed, I can’t handle it anymore?” And then once we know that number, now we’re able to start actually building your customized plan. So with every single one of our clients, we’re going to have a conversation with them about risk. Once we know their viewpoint, their individual viewpoint of risk, we build for them their own individualized plan that will work within their viewpoint of risk.
	So if you’re listening to this and you’re thinking, I don’t know if my plan is where I want it to be risk wise. Maybe if you are not working with us or maybe you have a question about it no matter what, and you’re thinking, well, how do I think about risk? How do I have this conversation? Here’s a way you can do it. You can go to our website, top right-hand corner, click on schedule a call, and our calendar will come up, hop on the call. We’ll talk to you for 15 minutes, give you some guidance. If we decide, hey, we would like to have a deeper conversation and we’ll walk you through exactly how to do that ultimately.