Be aware of the retirement risk zone

Retirement is one of the biggest periods of transition in our lives. Most people accept that they will have to adjust to changes in their lifestyle when they retire.

From a financial perspective, many people worry about whether they will have enough income to carry out the lifestyle they want. Retirees will have to deal with significant income changes because they need to replace their income from work with income from pensions or income from their portfolios. Financially, we often hear about the risks of inflation or the risk of outliving your income or the risk of not having enough money.

Retirement risk zone

One of the less commonly discussed risks of retirement is the risk of having too much market risk in your portfolio at a time when you need income. This risk is not new but thanks to some work by Manulife Financial and Dr Moshe Milevsky, a professor at York University, they are creating a new awareness for something they call the retirement risk zone.

The Retirement Risk Zone is the critical period leading into and just after retirement when the retirement nest egg is most vulnerable to market downturns. Some have said it is the five years before retirement and the five years after retirement.

The retirement risk zone should be important to people because short term portfolio losses due to markets during this time can have significant long term effects on the longevity of your portfolio.

Average returns can be misleading

Most financial and retirement planning is done using average return assumptions. For example, Jack’s retirement planning assumes that his portfolio over a long period of time will get him an 8% return. The problem is Jack can’t get an 8% GIC these days. Instead, Jack invests in a balanced portfolio of stocks, bonds and cash to try to get this 8%. Jack is not unlike most people these days reverting to mutual funds, stocks and other managed portfolios to try to enhance returns.

Although I have seen some balanced portfolios and mutual funds achieve long term average returns of 8%, I have not seen any return consistent returns of 8%. In other words, a portfolio that is exposed to the market does not make 8% each and every year. Instead, it might make 20% one year and then lose 4% the next year to average 8%.

Sequence is important

Most investors these days including those that are in the retirement risk zone are exposed to markets, it is crucial that investors are aware that the sequence of returns can have a dramatic effect on the longevity of your portfolio. In an example presented by Manulife Financial, Two investors Phil and Anne start with a portfolio of $206,049 and need to withdraw 5% per year for income (indexed to inflation). Both receive the same 8% average return over 25 years. The difference is that Phil suffers significant losses in the first two years. Even though the portfolio is mostly positive thereafter, the portfolio only lasts 14 years.

Anne’s returns on the other hand are the reverse of Phil’s returns. As a result, Anne’s returns for the first 7 years are positive and she does not experience the losses that Phil experienced until the last two years instead of the first two years. Anne not only makes it through the 25-year period but her $206,049 has grown to almost $800,000. The difference in results is simply due to the sequence of returns.

When planning for retirement, retirees need to really review their portfolios and see how much exposure they have to market risk. As you can see, the losses in the retirement risk zone (the period early in retirement) can have devastating long-term effect.


  1. Terry

    Hi Jim

    I was wondering if you and do a posting on Segrated funds leverage investing and paying the monthly interest only while in retirement is this classed as a risky investing pros and cons

    Thanks Terry

    You have done so many good topics to help us out
    thanks again

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