risk management

5 Tips to Help Eliminate Risk in Retirement

Effective risk management can be very beneficial to investors, and particularly helpful to those near or in retirement. Learn how to avoid common retirement planning pitfalls here with APO Financial.

We all face a myriad of risks in life, and many of these increase as we approach retirement age. Some of these risks are related to our health and wellbeing, others are related to our investments and financial planning. 

Running out of money during retirement is a serious worry for many Americans. When it comes to retirement, most people envision all of the fun experiences they will have. However, when people do retire and stop earning an income through the workplace, it could be a worryiome moment of realization. That reality being, their savings need to last them for the rest of their lives.

While you can’t control the direction of the market, you can control how your portfolio reacts and performs. Here are some strategies that can help mitigate risk wherever you’re at on your retirement journey.

Diversify your portfolio

When it comes to investing, there’s a lot of information out there. You may have heard the term ‘diversification’ when it comes to your portfolio. A healthy and diversified portfolio will have a mixture of stocks, bonds and other investments like annuities and real estate. Within the asset classes of stocks, there are funds that invest in large, midsize and small companies, international and emerging markets.

Diversification is a popular investment strategy that involves dividing your money between many different investments. By diversifying, you help reduce your risk by spreading your money across multiple types of investments. This helps reduce the chances that you’ll lose all of your money in one area, like a poor real estate purchase or falling crypto stocks.

There are also sector-specific categories like health care, technology, consumer staples, etc. A diversified portfolio will get the average return of all the investments within it. When we enter a bear market, your diversified portfolio will likely have some investments that are still performing positively with a reduced exposure to assets that aren’t.

Have a Spending Plan

At its most basic level, a Retirement Spending Plan estimates how you will spend money in retirement. Determining the right amount of income to withdraw from your retirement account can sometimes be a complex task, too. There are many factors that go into it, including the amount you’ve saved, the length of time until you retire, and market conditions.

While the process can be stressful, there are ways to make it easier on yourself. One of which includes having guardrails in place for your discretionary spending. Guardrail strategies allow you to set limits on how much money you can spend each year so that when market conditions change, or if you need to cut back on spending due to circumstances outside of your control (like a job loss), you will still have money available to you.

By including a Retirement Spending Plan, it will show you where your money is going and help keep you aligned, so you do not veer off course of your desired goals and objectives.  Ultimately, a solid plan will give you the peace of mind necessary to live the retirement you’ve envisioned – rather than fretting over forces that you can’t control. The right financial team can provide education and help alleviate stress while potentially avoiding costly mistakes related to your current and future finances.

Invest in an Annuity

Perhaps no investment product in existence generates a wider spectrum of reactions than retirement annuities. 

If you’re planning to retire in the next few years, it’s important to consider what kind of income stream you’ll need to support yourself. The most common way to provide a steady income is through annuities—which are contracts that provide guaranteed income for a specified period. Many annuities will guarantee an income stream for your entire lifetime.

This portion of your portfolio could be used for mandatory expenses like bills, food, etc. With the rest of your portfolio you can be more aggressive and strive for higher growth and income. Having an annuity and a guardrail strategy set in place can only help you in the long run.

While annuities are perceived as having large up-front costs and early withdrawal penalties that make them somewhat illiquid, they can be great for those who need extra income in retirement.

Please note, annuities may be subject to restrictions, surrender charges, holding periods or early withdrawal fees, which vary by carrier. With some annuities, you can pay for an optional rider that helps your payouts keep up with inflation.

Treat Your Home like an Asset

For those who own their home and have equity, you can consider creating a safety net for yourself by opening a home equity line of credit. By having this option available, you will have access to funds but will only owe interest on the money you withdraw. This can be implemented in tandem with your adaptive withdrawal strategy by accessing the line of credit when the portfolio is in decline. When the market begins to rise again, you can pay back the amount borrowed.

The benefit of this strategy is that it offers an easy way to access cash during times of unexpected expenses and/or market downturns. The downside is that the interest rates charged on these loans are typically higher than other forms of credit (such as credit cards). Therefore, make sure that if you plan on using this option that you have enough cash set aside for emergencies or unexpected expenses so that you don’t end up paying more than necessary just because of their high interest rates!

At the end of the day, if you are willing to sell or mortgage a house, home equity can be considered as part of your portfolio to fund retirement. Some retirees sell their homes outright to move into smaller homes, condos or assisted living facilities. Others tap into their home equity through reverse mortgages.

Have an emergency fund

You probably know the importance of an emergency fund while you’re working. The rule of thumb is to save three to six months’ worth of living expenses in case you lose your job or another unexpected expense occurs. That advice doesn’t stop when you retire. 

Whether you are in a good market or a bad one, your investment account should be able to support you. If the market is declining and your investment account is showing a loss, it may be better to let the dividends and interest reinvest in order to help out the portfolio. In such times of negative markets, it might be a better idea to draw upon your bank account in order to ensure that you won’t need to withdraw from your investments during this time period. Even though current interest rates are low, money in the bank will still allow you to avoid needing to withdraw from your investments during a short-term market loss.

You have many different avenues to build up your emergency fund before retiring. You can use your tax refunds, bonuses if you are still working or extra money from a part-time job. Depending on your situation and financial strategy, you may also use required minimum distributions (RMDs) to build your emergency fund.

Work with a Financial Advisor

As your circumstances, goals, and the financial markets change, it’s important to review your strategy and investment portfolio regularly to help ensure you remain on track to meet your goals. Successful retirement planning begins with understanding how economic changes may impact your investments. This is where a financial advisor can help.

What’s more, a financial advisor can help you determine the optimal balance across guaranteed, stable, and growth strategies that requires deep knowledge of the financial markets.

At APO Financial, our goal is to provide you with a holistic and sustainable plan in order for you to have a solid foundation, in which your finances can thrive. We take all factors into account and we continually update and monitor these plans and make necessary adjustments along the way.

By taking these steps to mitigate potential investment risks, you can better help secure your future. Gain increased transparency as well as the critical insight needed for mitigating risk with APO Financial. For more information on our retirement income services, contact us here today.


© 2021 APO Financial. All rights reserved.

Disclosure: Investment advice is offered through APO Financial Services, LLC (“APO") 10155 Westmoor Drive, Suite 175, Westminster, Colorado 80021-2627, an investment adviser registered with the Securities and Exchange Commission. Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services offered or that its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to APO are available at https://apofinancial.com. Additional information pertaining to APO’s registration status, its business operations, services and fees, and its current written disclosure statement is available on the SEC’s investment adviser public website at https://www.adviserinfo.sec.gov.

Information relating to annuities is intended for educational purposes only and should not be construed as comprehensive or all-inclusive. Therefore, it should not be regarded as a complete analysis of the subjects discussed and should not be used to make an investment decision.

Annuities can be an important part of an overall portfolio but may not be appropriate for everyone. Before purchasing an annuity, it is important to understand the details of the product. Certain products may not be available in your state. The terms of each indexed annuity varies. It is always important to speak to a financial professional. about an annuity’s features, benefits and fees, and whether an annuity is appropriate for you, based on your financial situation and objectives. Participation rates, cap rates and/or index spreads may be subject to change by the insurance company according to the annuity contract provisions. If the insurance company makes such changes, this could adversely affect the return. Guarantees of an indexed annuity are backed by the claims-paying ability of the underwriting insurance company. The surrender charge period for a product may be longer, and the surrender charges may be higher than other annuity products. Indexed annuities are long-term investments. If the annuity contract is surrendered early, there is the possibility of a surrender charge being imposed and/or the funds may be subject to income taxes. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances. With indexed annuities, there is the potential to lose money, depending on the product charges and minimum guarantee contract provisions. For additional information on annuities, reference the following websites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org) or your state's insurance department.
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