If you’ve invested in a CD, bond or even a mutual fund, you might think you’re pretty protected from risks but that’s not the case. Just because lower-risk, diversified investments don’t have the same dangerous elements as an extremely volatile stock, that doesn’t mean your savings are safe. If you’re relying on building up savings rather than creating an income for your post-retirement years, the risks that so-called lowrisk investments expose you to can ruin your plans and leave you vulnerable. Here is a list of five of the top risks your portfolio might be hiding.
If you have a fixed investment, such as a CD or bond, then you’re locked into a set interest rate until maturity. If the Federal Reserve raises interest rates during that term, your investment will no longer be as competitive as new ones issued. The only alternative will be to pay penalties for getting out early and the higher interest of a new instrument may not be enough to make that worthwhile.
You may think your mutual fund is well diversified and protects you from the risk of loss in the market, but even mutual funds are exposed to market risk. Market risk is systematic—meaning it affects every security.
It’s important that your investments grow at a rate that keeps up with inflation, otherwise this regular increase in the cost of goods and services will cannibalize your savings. Sadly, many fixed investments have interest rates that fall well below the average rate of inflation.
With some investments, such as real estate and certain funds, you have limited ability to sell and access your principal. This is called liquidity risk and it’s dangerous for seniors who may need to regularly sell assets in order to take distributions.
Sometimes interest rates go up and sometimes they go down. When you’re in a declining interest rate environment and you have CDs and bonds maturing, you will find it difficult to reinvest that principal in new fixed investments that have the same high rates. You may be required to lock your principal in for longer periods or move to a riskier investment in order to get the same or similar returns.
During retirement, income matters. When you structure your retirement plan so that it provides a life-long income, you don’t have to worry about many of these risks. Simple diversification isn’t enough. Instead, an approach that focuses on income allows you the opportunity to lock-in gains while minimizing future risk.
In the next installment of the INCOME MATTERS series, we’ll talk about all the options available to you for income creation as well as their benefits and drawbacks. For more information about retirement planning, be sure to check out our retirement planning services or contact us for more information.