When planning for retirement, most of us focus on one big number: the rate of return. We check it religiously, compare it across investment options, and let it dictate our financial strategy. But the truth is, that one number tells only part of the story. In fact, it might be one of the least important aspects of your portfolio when you’re approaching or already in retirement. The question you should be asking is: How safe is your retirement portfolio?
In this article, we’ll unpack the risks that many people overlook, simplify some financial jargon, and help you understand the critical elements that actually determine whether your retirement money will last.
Why Rate of Return Isn’t the Whole Picture
Let’s start with a common misconception. Say you have two investment options:
- Investment A has a 10% average annual return over the past 10 years.
- Investment B also has a 10% average annual return over the past 10 years.
Most people would assume they’re equal—so what’s the problem?
Here’s the twist:
- Investment A comes with a downside risk of 20%.
- Investment B has a downside risk of only 5%.
Which one do you want now?
Obviously, Investment B feels safer—and it is. But what this example highlights is that average return doesn’t reflect how dangerous the investment really is. To make smart decisions, you need to understand what’s going on beneath the surface.
The Real Question: What Risk Are You Taking to Get That Return?
We’re used to asking, “What return can I get?” But the better question is: “What risk am I taking to get this return?”
Risk tolerance and risk capacity come into play here.
- Risk tolerance is how much volatility you feel comfortable with.
- Risk capacity is how much risk your financial situation can actually handle.
They’re not the same. For instance, you might feel fine with some market dips when you’re still earning a salary. But when you retire and start withdrawing from your savings? That same dip could devastate your financial plan.
The Retirement Mountain: Going Up vs. Coming Down
Think of saving for retirement as climbing a mountain. You work hard to build your nest egg, and eventually, you reach the top—the moment you retire.
But here’s what most people don’t realize: Going down the mountain is not the same as going up.
When you’re working and contributing to your accounts, you can afford some losses because you’re still adding money. But once you retire and start withdrawing from those accounts, everything changes. A big loss at the wrong time can be catastrophic.
Imagine reaching the top of the mountain with $1 million, only to see it drop to $500,000 after a market crash. That’s not a small setback. That could mean working longer, downsizing your lifestyle, or running out of money too soon—all because you didn’t adjust your portfolio for the descent.
The Biggest Danger in Retirement? Big Losses
Here’s the most important truth:
You don’t need to make great returns to have a successful retirement. You need to avoid great losses.
That’s why focusing only on average return is dangerous. You could chase high returns without realizing you’re exposing yourself to massive potential losses—and in retirement, losses hurt more than gains help.
The Power of Standard Deviation (Don’t Panic, We’ll Simplify It)
Now we’re going to introduce a term that might sound intimidating: standard deviation. But stay with us—this one is important, and we’ll keep it simple.
Standard deviation is just a way to measure how much the returns of your portfolio vary over time. A high standard deviation means your portfolio has wide swings—big ups and big downs. A low standard deviation means it’s more stable.
Here’s the simple rule of thumb:
If your portfolio has a standard deviation of 15, multiply it by 3.
15 × 3 = 45 → That’s the kind of loss you might see in a major market downturn.
So, if your $1 million portfolio loses 45%, you’re suddenly down to $550,000. Can you still afford your lifestyle? That’s the question you need to answer before the market tanks.
Max Drawdown: The Real Eye-Opener
Another term to know is max drawdown. It refers to the largest single drop from peak to trough in your portfolio value before it recovers.
For example, say your portfolio grows to $1.2 million, then drops to $600,000 during a crash before climbing back up. That 50% drop is your max drawdown.
Max drawdown is directly related to standard deviation. The higher your portfolio’s volatility, the bigger your potential drawdown.
If you’ve never asked your advisor, “What’s my portfolio’s standard deviation and max drawdown potential?”—you’re investing blindly. You need to understand the possible worst-case scenario.
The Mistake Most Investors Make
People often come into financial advisors’ offices and ask, “What’s the average rate of return on your portfolios?”
It sounds like a smart question—but it’s not.
Instead, you should be asking:
“How much risk did you take with client money to get those returns?”
That’s what truly matters. If a portfolio averages a 20% return, but it carries a 50% drawdown risk, you might be signing up for more pain than you can handle—especially in retirement. And the most frustrating part? You may not even need 20% returns! You’re already at the top of the mountain—why risk falling off?
No One Told You? That’s a Problem
Many people learn about these risks too late. They come in after a bad year—like 2022—when their portfolio has already dropped 30% or more. They say, “I didn’t know this could happen.”
The response from advisors? “How did you not know?”
And the answer is always the same: “No one told me.”
That’s why education is key. Knowing your risk exposure before trouble hits is one of the most powerful things you can do to protect your retirement.
The Takeaway: Protect Your Retirement with Knowledge
If this information is making your eyes widen, that’s a good thing. Most people have done an incredible job climbing the mountain—saving, working hard, and building wealth. But without the right knowledge, the trip down can be treacherous.
So here’s what you need to do:
- Ask your advisor for your portfolio’s standard deviation.
- Find out your potential max drawdown.
- Understand your risk capacity in retirement—not just your tolerance.
- Don’t chase big returns if you don’t need them. Focus on avoiding big losses.
- Make sure your investment strategy changes when you shift from accumulation to distribution.
How Safe Is Your Retirement Portfolio? Final Thoughts
Your retirement portfolio isn’t just about performance—it’s about resilience. The peace of mind that comes from knowing your money is safe from catastrophic loss is worth far more than a few extra points of return.
You’ve worked hard to get where you are. Now it’s time to make sure your portfolio works just as hard to protect what you’ve built.
It’s not just about climbing the mountain—it’s about coming down safely.
Also read: Can Your Portfolio Withstand a Major Market Downturn?
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