Changing Risks in Retirement
It is important to understand from the very outset how changing risks are primarily what separate retirement income planning from traditional wealth management. Retirees have less capacity for risk, as they become more vulnerable to a reduced standard of living when risks manifest. Those entering retirement are crossing the threshold into an entirely foreign way of living.
Reduced earnings capacity
Retirees face reduced flexibility to earn income in the labor markets as a way to cushion their standard of living from the impact of poor market returns. One important distinction in retirement is that people often experience large reductions in their risk capacity as the value of their human capital declines. As a result, they are left with fewer options for responding to poor portfolio returns.
Risk capacity is the ability to endure a decline in portfolio value without experiencing a substantial decline to the standard of living. Prior to retirement, poor market returns might be counteracted with a small increase in the savings rate, a brief retirement delay, or even a slight increase in risk taking. Once retired, however, people can find it hard to return to the labor force and are more likely to live on fixed budgets.
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