Are you prepared to enter the danger zone?
That's the time right around retirement when you have accumulated savings and are on the verge of drawing them down. A wrong move or a significant bear market at that point can have an outsized effect on your future financial life.
The question is, what constitutes a wrong move?
Many experts argue that those years are a time to pull in your horns and ratchet down the risk in your investments. "In the absence of guarantees," like a variable annuity allowing some withdrawals, "you probably want to reduce your exposure to equities as you get into retirement," said Srinivas Reddy, senior vice president and head of full service investments for Prudential Retirement. "You've got the biggest pot of money to worry about," since you now have a lifetime of savings that you are about to start using.
Prudential, which has actually trademarked the term "retirement red zone," sees a variety of risks, in part from people investing too aggressively to make up for lost time.
Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, also believes it is wise to reduce equity exposure as retirement nears. "There's less of a chance of losing money in the long run" with stocks, he said, since investors have more time to recover from market declines, but "there is more of a chance of losing a great deal of money" as retirement nears, since investors tend to be at their wealthiest point.
In addition, he said, young people have plenty of low-risk assets in the form of the present value of their future earnings, and relatively little to to invest, so they can afford to take more risk with the money they have. As people age, they tend to have less in the way of future earnings and more in the way of savings, so ratcheting down equity exposure to keep overall risk in check makes sense.