What’s the worst that could happen when you’re planning your retirement? For many, it’s the prospect of working and saving hard in their 20s to 50s, only to have a major market decline hit just as they’re finally retiring.
An extreme market event is no fun for anyone, but its impact on a 62-year-old is completely different from its effect on a 30-year-old.
When you’re older, and the market declines dramatically, it can erode decades of your retirement savings and totally alter your lifestyle in retirement. It may even prevent you from retiring when you had planned.
Such an event is not hypothetical. Consider the 2008 financial crisis. According to a study by Pew Research Center, one-third of those age 62 and older delayed their retirement as a result of its impact.
CNBC reports on one concept developed by Prudential Retirement Services called the “Retirement Red Zone.” In the article, Srinivas Reddy, senior vice president at Prudential Retirement, notes: “The 10 years leading up to retirement and the 10 years after are all risky…. But the five years when you retire are among the riskiest.” Bad investment performance in this “zone” can have a significant – and likely permanent – impact on a retired/retiring individual’s portfolio.
One option to protect your nest egg during the red zone years is called “de-risking”-reducing your exposure to stocks and allocating more to less volatile asset classes such as fixed income investments.
Bonds are typically less risky than stocks. (In fact, they have not declined by 10% or more during any calendar year since 1926.) In fact, bonds as a de-risking strategy during the 2008 stock-market correction would have preserved wealth for those in the red zone.
De-risking doesn’t mean removing all equity risk; equities play an important role by facilitating growth. Your advisor can help you determine the best allocation for you.