Risk aversion is a big risk

Studies show most Canadian investors are highly risk averse. What most don’t realize is that aversion itself can be the biggest risk to meeting future income goals.

Many have concluded the best way to reduce risk is to park their money in GICs, T-bills, government bonds, or high-interest savings accounts. The return may be small, but at least the money’s safe, right?

Wrong.

What most don’t understand is that these so-called risk-free investments actually are loaded with risk. Because baseline interest rates are at historic lows, there’s a good chance all your gains, plus some of your principal, will be eaten up by long-term inflation.

By investing in securities that return more than inflation, you’re able to retain the buying power of your savings as well as add to your asset base. This helps protect against longevity risk—the fact you will likely live longer than prior generations and therefore need more money after you stop working.

So, taking on a little more risk with your investment choices actually reduces the risk that you’ll run out of money.

If you don’t know what annual return you’ll need to fund your retirement, you’re not alone. A recent study showed a large proportion of people over 55 are in the dark about this issue.

But it’s not your fault. It’s a complicated calculation that requires specialized software. A range of variables need to be considered; for instance, how much you have at the start of retirement, how much you plan to withdraw, expected rates of return on your investments, inflation projections, and other inputs.

The key is to understand the retirement landscape is completely different today than it was only a couple decades ago. To avoid running out of money, retirees have only two choices: scale back on annual spending in the drawdown phase, or build up a greater asset base by taking on a little more risk pre-retirement.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.