A Guide to Reframing Risk in Retirement

Why Risk Needs a New Definition When You Retire

During our working lives, we often learn to view risk as something to avoid. Many believe that risk simply means volatility, and therefore assume that conservative, low-return investments are safer once they stop working. However, retirement creates a very different financial landscape. You move from saving to spending, your investment time horizon may be longer than expected, and your income requirements typically become more structured.

Because of this, the real risks in retirement are not always the ones people expect. Instead of focusing only on short-term market dips, it may be more important to consider issues that can gradually erode wealth over many years—such as inflation, poor withdrawal planning, or ineffective tax strategies.

Reframing risk is not about taking more risk; it’s about identifying which risks have the greatest long-term impact.

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The Traditional View: Avoid Volatility at All Costs

Historically, many retirees moved into ultra-conservative investments at retirement. High allocations to cash deposits, fixed income and guaranteed income products were often seen as the only sensible choice.

The challenge? These assets can feel safe in the short term while delivering returns that fail to keep pace with inflation. Across a 20- to 30-year retirement, this approach can limit income potential and reduce purchasing power.

Example:
A retiree holding £200,000 in low-yielding deposits may protect their nominal capital today, but inflation could significantly reduce what that money buys over time. If inflation averages between 2–4%, spending power can fall by 30–40% over 20 years.

In this context, avoiding volatility may come with a long-term cost.

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Modern Retirement Risk: What Often Matters Most Today

There are several risks that may have a greater impact on long-term retirement income than short-term market movements:

1. Longevity Risk

People are living longer. A 65-year-old today has a meaningful chance of living beyond 90. Retirement planning therefore often needs to consider a much longer time horizon.

2. Inflation Risk

Inflation gradually erodes value. Spending needs can rise later in life due to healthcare, lifestyle choices, or family support, yet many retirees hold assets that struggle to match price increases.

3. Sequence-of-Returns Risk

This relates to withdrawing from investments when markets are down. Poor timing early in retirement can reduce how long a portfolio lasts. Thoughtful withdrawal planning can help mitigate this.

4. Cash and Interest Rate Risk

Low interest rates on cash savings can restrict income growth. Even when rates rise, cash rarely outpaces inflation over long periods.

5. Tax Drag Risk

Without structured planning, unnecessary tax can reduce overall returns. Choosing the wrong investment vehicles or holding assets in inefficient structures may result in avoidable tax costs.

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Reframing Risk: Moving from Avoidance to Management

Modern retirement planning focuses less on avoiding volatility and more on balancing different types of assets to support long-term income needs. A retirement portfolio often blends below assets with potential for:

• Growth-orientated assets (e.g., equities, diversified funds, alternatives)
• Income-generating assets (e.g., bonds, dividend stocks, structured income products)
• Liquidity assets (e.g., cash, short-duration bonds)
• Tax-efficient structures (e.g., pensions, bonds, assurance vie, portfolio bonds, SIPPs, QROPS, depending on residency)

The aim is not to chase high returns. Instead, the intention is to support sustainable withdrawals while maintaining purchasing power and access to capital where required.

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The Value of Structured Withdrawals

One common misconception is that withdrawals must be either fixed or unpredictable. A more balanced approach usually sits in the middle.

Structured withdrawal strategies typically focus on:

• A sustainable annual withdrawal rate (often 3–6%, depending on circumstances)
• Flexibility to adjust withdrawals in high- or low-return periods
• Holding short-term cash buffers to avoid selling investments at a loss
• Making use of available tax allowances

Many advisers use a “bucket strategy”:

Bucket	Time Horizon	Purpose	Typical Assets
1: Short-Term	0–3 years	Spending needs	Cash, MMFs, short bonds
2: Medium-Term	3–10 years	Income support	Bonds, dividend funds
3: Long-Term	10 years+	Growth and legacy planning	Equities, global funds, alternatives

This approach allows a portion of the portfolio to grow over time, while short-term spending needs are supported by more stable assets.

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What “Safety” Really Means in Retirement

True financial safety in retirement is not necessarily about avoiding market fluctuation. A sense of financial security is more likely to come from having a plan that supports income needs even when markets move. This usually involves:

✔ Diversification across asset classes

✔ Selecting tax-efficient investment structures

✔ Holding liquidity for short-term spending

✔ Global investment diversification

✔ Ongoing portfolio reviews and adjustments

When these components work together, risk becomes something that can be managed, rather than something to fear.

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Why Professional Advice Can Be Particularly Helpful

Many people manage investments themselves during their working lives. However, turning accumulated assets into a structured retirement income is more complex. Common mistakes include:

• Withdrawing too much during market downturns
• Holding too much cash for too long
• Missing tax allowances and cross-border planning opportunities
• Choosing unsuitable investment vehicles for their residency

A regulated financial adviser can:

• Assess sustainable withdrawal rates
• Help manage unnecessary tax liabilities with the assistance of a qualified tax adviser.
• Support currency and cross-border considerations
• Adjust strategies as market conditions and personal needs change

Advice does not remove risk, but it can help shape the way risk is managed.

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Final Thoughts: Risk is Not the Enemy

Successful retirement income planning is not about eliminating risk. It is about understanding the different types of risk and managing them in a way that supports long-term goals.

Markets will fluctuate and inflation will vary, but with a suitable structure, risk can become a tool to help maintain purchasing power and support retirement income over time.

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Looking to Review Your Retirement Strategy?

Speaking to a regulated financial professional can provide guidance and help you consider the most appropriate structure for your income, investment, and tax planning in retirement.