How does your risk tolerance change in retirement?

Understanding how you perceive risk – and how this changes over time – can help in navigating today’s retirement landscape. 

It has long been accepted that we become more risk-averse as we get older – we’re less likely to put ourselves in the way of possible harm. This tends to be attributed to experience, and the idea that with age comes wisdom. But it may be more complicated than that.

A 2016 study,  for example, found that age-related declines in risk tolerance may be linked more to changes in brain anatomy over time than to experience gained.1 And researchers who studied long-term shifts in individuals’ risk attitudes found that even when factoring in characteristics such as income, wealth and education, risk appetite falls as we age.2

Anything that affects our relationship with risk as we get older has clear implications for the investment choices we make in retirement – and our chances of good outcomes. It’s all about risk tolerance, which behavioural finance expert Oxford Risk defines as an investor’s “willingness to accept the chance of bad final outcomes in the hope of good ones.”

Risks and responsibility

Most people remain invested in retirement these days, typically through drawdown arrangements. Staying invested means staying engaged, with a series of decisions to make as we progress through retirement.

Risk is at the heart of these decisions – and can involve everything from the balance of an investment portfolio, and responses to changes in attitudes and circumstances, to the level of income we want to take.

Indeed, there are risks that are unique to drawing an income if you remain invested in retirement, points out Danni Brotherston, Head of Advice Policy and Development at St. James’s Place Wealth Management.

“It’s a whole different suite of risks, and you have to become more mindful of it,” she says. “It’s also the case that people tend to become more risk-averse when they don’t understand the risks they might face.”

It’s important to distinguish between risk tolerance – our willingness to take risk – and risk capacity, which is more about the risk we can afford to take. As a rule, tolerance doesn’t change significantly, but capacity does. In later years, the two become much more closely aligned, in a process that makes it vital to review our feelings about risk as we move into and through retirement.

Understanding your choices

It makes sense to feel differently about risk as we enter our later years – the time available to recoup investment losses becomes shorter, and no one wants to run out of money. So we need to consider how our feelings about risk continue to change throughout retirement

“For someone retiring at 60, cashflow modelling may show that their money will last until they are 85. At 60, that feels okay. But when you reach 80, it’s a very different conversation, even though nothing has really changed in terms of the original projections,” says Brotherston.

The retirement landscape can be a complex one to navigate, particularly as we’re living longer. Plotting a successful path through a retirement that could last for three decades or more requires an understanding of the risks we’ll face and how our relationship with risk changes over time. This is where professional advice can help.

The Financial Conduct Authority has serious concerns about the choices of those making retirement income decisions without advice. It revealed in 2018 that a third of non-advised drawdown consumers had their entire pension in cash, while more than half of those accessing pension pots were missing out on potentially valuable guaranteed or safeguarded benefits.3

“You really need an adviser at this point, because it can be complicated,” says Brotherston. “Advisers play a big part in helping you understand what you need to know, the different types of risks, how these may change over time, and what can be done to mitigate them.”

To start a conversation about your risk tolerance in retirement, get in touch with us.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

1‘Neuroanatomy accounts for age-related changes in risk preferences’, Nature Communications, 2016
2‘Risk Attitudes Across The Life Course’, The Economic Journal, 2017
3Retirement Outcomes Review, Financial Conduct Authority, 2018

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