Insurance vs Investments in Retirement?

Labor Day is around the corner. This is often the official change in season for many with the start of school. It has got me thinking about another key date in our lives…….the date we officially start to live off our savings.  Retirement Date.

As with the change in season, should we be doing something different with our nest-egg now that we are retired? I think the answer is yes – retirement means we now have a different risk exposure than before. Now, Sequence-of-return risk and Longevity risk are elevated and must be carefully considered.

Sequence-of-return risk is the risk that even though an average return is achieved over a long time frame, the order individual returns come at you matters. In the first years of retirement your nest-egg is as big as it will ever be.  If you get hit with big negative returns in the first few years – it will hurt a lot. If the bad years came later when your portfolio is smaller, the impact is less.

Longevity risk is simply the fact we do not know how long an individual will live. To be conservative, we plan for a long healthy life. Maybe too long. Maybe it would be better if we could plan for an “average” life?

I will let you know my bias immediately – I am not a fan of insurance products in general. They are often sold as the only form of risk management available when that is not true. In addition, they are often confusing, and contain a variety of fees that do not benefit the purchaser. However, that being said, insurance products may have a role to play in mitigating Sequence-of-return risk and Longevity risk.  (More detail in my next post.)

For today, I just wanted to focus on the concept that Retirement Date does mark a change in one’s risk profile. Normally one has been using investments in the accumulation phase of life. Now in retirement, we are looking at decummulation, and might have to dip our toes into the world of insurance a little. The risk sharing properties of insurance might be just what the change of season requires.