Risk Tolerance in Years Around Beginning of Retirement

One thing that seems to be a gray area for individual investors is the risk tolerance and asset allocation for the years leading into/just after retirement. Under what circumstances would high yield bonds, equities, alternatives and other riskier, but not necessarily “core” asset classes be appropriate for investors around this stage of life?

  • When the investor does not have any major bequest or gifts planned
  • When his asset base is large relative to spending needs
  • When he receives pension, even better if it is linked to inflation (implies low dependence on portfolio to meet regular spending needs)
  • When the investor is going to receive a large inheritance in the future

Time horizon when an individual has just retired, is considered long. So if everything mentioned above is favorable, then these asset classes are reasonable choice.

But also note, that in case the investor has a planned gift which he necessarily wants to accomplish, it might even mean more aggressive allocation.

To summarize, those riskier assets are acceptable when the investor has the ability to take risk. na_27 correctly points out certain situations that might allow an investor to take an above average level of risk given her age.

In general, an older investor near retirement favors low risk, liquid securities. If these needs are already taken care of, such as with an existing large asset base, it is fine for the investor to own some riskier, less liquid securities such as high-yield bonds.