How Investment Risk Informs Your Retirement Strategy

Like the weather, your risk tolerance changes over time, even during retirement. Determining your risk tolerance will help you adjust your strategy for each retirement stage. 

Here’s what you should know about risk, especially in early retirement, and how you can use it to build your retirement strategy.   

Key Takeaways

  • Risk tolerance is as ingrained as your personality, though it may change over time.
  • Risk capacity is tied to how much you can financially afford to lose.
  • Understanding your risk tolerance and capacity will help you comfortably build, reallocate, and withdraw from your retirement accounts.

Glossary of Terms

Risk tolerance

Psychologically, how much you are comfortable losing and how do you react to loss.

Risk capacity

How much you can financially afford to lose.

Time horizon

When you plan on withdrawing the money you’ve saved.


Stage before retirement age, generally ages 50-62.

Early retirement

The first few years of retirement, generally ages 62-70.

Assessing Your Risk Tolerance

Your risk tolerance measures your propensity for investment volatility, or in other words, how you react emotionally to market movements. 


Do you panic and want to sell if your portfolio takes a 15% dip? What decisions have you made in the past during similar market trends? Naturally, your response to those questions may change over time. 


Younger investors, for example, are less loss averse because they know they’ll have time to recoup any investment losses or contribute more to the accounts. But, investors during early retirement are less risk tolerant because they don’t plan on adding more to their retirement accounts and are beginning to live on their money. Their lifestyle may not withstand big swings in the market. As a result, their choices will likely be more conservative. 


Understanding where you emotionally land on the risk tolerance scale will help you build a diversified portfolio that suits your needs long-term—and doesn’t keep you glued to cable business news channels, unless you really enjoy that kind of thing. 


One last word of advice: be honest with yourself. If you’re not an adventurous Wall Street investor, don’t strategize like one. There are no wrong answers when you’re figuring out your risk tolerance. Customizing your financial plans to match your personality and values will ensure that you’re comfortable and confident with your plan. 

Determining Your Risk Capacity

Your full risk profile also encompasses your risk capacity, which is both the amount you can afford to lose and the amount of risk you “need” to take to reach your retirement goals. 


For example, you likely couldn’t hit your retirement savings goal by investing only in cash and bonds. You need more risk—and subsequent reward—to reach your numbers. When your risk tolerance and capacity are aligned, you set yourself up for success. 

Risk Tolerance + Risk Capacity = Retirement Investment Strategy 

Knowing how much you can afford to lose and how you’ll react when losses happen will help you put together your overall investment strategy and make allocation adjustments along the way. 


You may think that the only time to strategize is while you’re a pre-retiree, but those early retirement years also can have a critical impact on your portfolio. Mainly the timeline of when you start to receive distributions.


You may also notice that your risk tolerance and capacity levels aren’t quite on the same page. That’s okay, and actually pretty normal. 


Let’s look at an example of a worker in early retirement to see how tolerance and risk capacity interact with financial decision-making. 


Worker A is 65 and has been eligible to receive social security for three years, but she’s waiting until she retires at 70 to begin withdrawals. She’s an executive in her company, and these are her top earning years. Her risk capacity is probably higher than normal because she’s able to contribute more to her portfolio than she ever has. 


On the other hand, she’s nearing retirement and doesn’t have many earning years left, making her tolerance for large losses low. Worker A is also risk averse. Her retirement strategy has been slow and steady.


Now that she can contribute more and is beginning to match her cash flow to her target amount during retirement, Worker A wants to transition some of her riskier accounts to bonds and cash.  


Several factors can affect how your investment personality profile translates into action.

  • How diversified your portfolio is.
  • Your time horizon, or how much time you have to save until you retire and how long you need that money to last. 
  • How much you have in cash and what are your short-term spending needs, like paying off your mortgage or supporting an aging family member. 
  • Other sources of income.
  • Retirement lifestyle goals.

It’s a lot to juggle, but all of these decisions become easier to make when you understand your personal risk tolerance.

Be Prepared for Change Even During Retirement

Many people think of retirement as one life stage, but it’s really several. We imagine retirement as happening in three different phases: go-go, slow-go, and no-go. As you can see, it’s not age that breaks up the phases, but activity level and lifestyle. Both of these are better indicators of spending (and retirement cash flow). 


Go-go retirees 

This is similar to the early retirement stage we mentioned earlier. You’re the most active during this stage, wanting to travel, kick start retirement hobbies, and spend time with your grandchildren. It’s also when you may be spending most of your income on activities or paying off any remaining debt.


You can expect your expenditures to be a bit higher during this time than any other. Your income is still fixed, and you’ll want to be cognizant of your tax requirements. You may retain some of your riskier investments to potentially reap higher gains, but you’ll want able investments to generate a consistent cash flow.


Slow-go retirees

As the name implies, you’re slowing down. You’re not getting around as much and may see a jump in your medical expenses. Again, keeping an eye on your income will help you plan effectively for Medicare premiums and unexpected tax bills. 


Strategically, this can be a time to increase your riskier investments as you’ve gotten through the most vulnerable and expensive phase of your retirement.

No-go retirees

At this point, you’re staying put. Your biggest expenses may be housing and medical care. Your concerns may shift to end of life and either making sure you have just enough to see you through or shifting your accounts to easily transition to your beneficiaries.


You may have your mind on the super long game, as in making your money last for generations. 

Can you see the subtle shifts in intention? Being attuned to your investment risk helps you build intentional portfolios and strategies that serve your life—and beyond. 


Contact us at Metanoia Financial to learn more about your risk tolerance personality and how to translate that into an investment strategy.