As workers enter the retirement ‘red zone,’ they should opt for less investment risk

Just like a football team entering the red zone — the area of the field inside the opponent’s 20-yard line — should be extra cautious to avoid wasting a scoring chance, Americans who are nearing retirement should dial back aggressive investment strategies.

That’s the advice of Kevin Wade, a financial planner with Centennial Advisors LLC, in a column published Monday by personal finance website Kiplinger.

Wade writes that younger workers can place their money in riskier investment vehicles, such as equities, without worrying about large declines in the stock market. “That’s because they’ve got 40 years or so until retirement and don’t have to fret about major market swings as would a person in their 50s or 60s,“ he said.

Once a person gets within 10 to 15 years of retirement, however, they should scale back the level of risk they’re willing to tolerate from their investments. Wade uses the analogy of a football team being protective of possession near the end zone because they’re “in a good position to score and don’t want to waste the opportunity with a costly mistake.“ 

“No one wants to be five or six years from retirement and suddenly lose 30% to 50% of their portfolio because they didn’t adjust their plan properly,“ he wrote.

This could be particularly true at a time when fewer U.S. workers have access to a pension plan. A report from the Congressional Research Service found that the number of Americans with a pension declined from 27.1 million in 1975 to 12.6 million in 2019. Meanwhile, workers with a defined contribution plan, such as a 401(k) or 403(b) account, rose from 11.2 million to 85.5 million during these years.

Additionally, more Americans are worried about the level of Social Security benefits they’ll receive in retirement. A recent Gallup poll found that 80% of respondents under the age of 62, and 86% of respondents in their 40s, feared that Social Security will not exist by the time they’re eligible for benefits.

Federal lawmakers are attempting to address Social Security fears with legislation that would expand the monthly benefit by changing the way that cost-of-living increases are calculated. A Senate version of the bill, known as the Boosting Benefits and COLAs for Seniors Act, has yet to make it out of committee.

Wade advises that people nearing retirement should focus on a diversification strategy centered around safer investments — including annuities, bonds and certificates of deposit. He also believes that a shift in mindset for older workers is necessary even when the stock market is performing well.

“Let’s say you’re coming off of a year where you might have made a 12% to 18% gain in your portfolio,“ he wrote “The last thing you want to consider is scaling back your risk. But you don’t want to get in a situation where you’re constantly chasing returns as you approach and enter your retirement years. Taking unnecessary risk, in order to chase higher returns because of a loss that could have been avoided, is not the way to spend your retirement years.“