Serene retirement with balanced liquidity and investment

Retirement Risks: How to Tailor Your Strategy for Peace of Mind

Lena Kashyap in Business & Economy September 2025 • 4 min read.

"Understanding and navigating liquidity and investment risks for a secure retirement."

Planning for retirement often focuses on accumulating sufficient savings. However, retirees face the critical task of decumulation—strategically spending those savings over their remaining years. This process is fraught with financial risks, primarily liquidity risk (the need for readily available cash) and investment risk (the potential for losses in the market). Balancing these risks requires a tailored approach that reflects individual preferences and circumstances.

Traditional retirement planning often uses lifetime utility models, which consider a retiree’s overall appetite for risk. Yet, this approach may not fully capture the nuances of decumulation. Retirees might feel differently about running out of cash versus experiencing investment losses, leading to varying preferences for managing each type of risk. Ignoring these nuances can result in suboptimal decumulation strategies.

Recent research explores the impact of differing risk appetites on optimal decumulation strategies. This article breaks down these findings, offering insights into how retirees can customize their financial plans to address both liquidity and investment risks, ultimately enhancing their financial security and peace of mind.

Decumulation Risks Defined: Understanding the Key Challenges

Serene retirement with balanced liquidity and investment

Decumulation risks are sources of uncertainty that can impact a retiree's financial goals, both positively and negatively. These risks go beyond simple market volatility, affecting the retiree’s ability to maintain their desired lifestyle and leave a bequest.

Let's break down the primary decumulation risks retirees need to consider:

Liquidity Risk: This involves the uncertainty of needing immediate access to funds for unexpected expenses or life changes. Events such as long-term care, medical emergencies, or assisting family members can require substantial withdrawals, permanently altering a retiree’s financial circumstances.
Investment Risk: Fluctuations in market returns can significantly impact the value of a retiree's portfolio. Poor investment performance, particularly early in retirement, can deplete savings and jeopardize long-term financial security.
Inflation Risk: The erosion of purchasing power due to rising prices is a significant concern for retirees on a fixed income. Inflation can outpace investment returns, reducing the real value of savings over time.
Longevity Risk: Living longer than expected can deplete retirement savings, creating financial strain in later years. Accurately estimating lifespan and planning for extended retirement periods is crucial.

Each of these risks requires careful consideration and a customized strategy to mitigate their potential impact.

Crafting Your Retirement Strategy: It's All About Balance

Successfully navigating retirement requires a holistic approach that acknowledges and addresses the various risks involved. By carefully considering your risk preferences, exploring different decumulation strategies, and seeking professional advice, you can create a retirement plan that provides both financial security and peace of mind.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2312.14355,

Title: Optimal Strategies For The Decumulation Of Retirement Savings Under Differing Appetites For Liquidity And Investment Risks

Subject: econ.gn q-fin.ec

Authors: Benjamin Avanzi, Lewis De Felice

Published: 21-12-2023

Everything You Need To Know

What is liquidity risk in the context of retirement decumulation, and why is it important to manage?

Liquidity risk during retirement decumulation refers to the possibility of needing immediate access to funds for unexpected expenses, such as medical emergencies or long-term care. Effectively managing liquidity risk is crucial because unexpected withdrawals can permanently reduce a retiree’s financial security. Insufficient liquidity may force retirees to sell investments at unfavorable times, exacerbating financial strain. While investment risk focuses on market fluctuations, liquidity risk centers on having enough cash available when needed. Without proper liquidity planning, retirees may be forced to make difficult choices that jeopardize their long-term financial stability. Considering potential large, unexpected expenses and maintaining a sufficient cash reserve is a key part of managing this risk.

How does investment risk affect a retiree's financial security, especially early in retirement?

Investment risk refers to the potential for losses in a retiree's portfolio due to market fluctuations. Poor investment performance, particularly early in retirement, can significantly deplete savings and jeopardize long-term financial security. This is because early losses reduce the principal amount, making it harder to recover and achieve the desired retirement income. Investment risk should be managed by diversifying investments, periodically rebalancing the portfolio, and carefully considering risk tolerance when making investment decisions. Failure to adequately manage investment risk can lead to a retiree outliving their savings or having to significantly reduce their lifestyle.

Beyond liquidity and investment risks, what are some other key decumulation risks retirees should be aware of?

Besides liquidity risk, which involves the need for readily available cash, and investment risk, concerning potential market losses, retirees should also be aware of inflation risk and longevity risk. Inflation risk refers to the erosion of purchasing power due to rising prices, which can reduce the real value of savings over time. Longevity risk is the chance of outliving one's savings due to living longer than expected. Each of these risks requires careful planning and a tailored strategy to mitigate their potential impact on financial security.

How do lifetime utility models fall short in capturing the nuances of retirement decumulation, and what is a better approach?

Traditional retirement planning often uses lifetime utility models, which consider a retiree’s overall appetite for risk. However, this approach may not fully capture the nuances of decumulation because retirees might feel differently about running out of cash versus experiencing investment losses. Ignoring these nuances can result in suboptimal decumulation strategies. A better approach involves recognizing and addressing individual preferences for managing different types of risks, tailoring financial plans to address both liquidity and investment risks specifically, which ultimately enhances financial security and peace of mind.

What strategies can retirees implement to customize their financial plans and address both liquidity and investment risks effectively?

To customize financial plans for liquidity and investment risks, retirees should first carefully consider their risk preferences, acknowledging that their tolerance for liquidity risk (running out of cash) might differ from their tolerance for investment risk (market losses). Next, explore different decumulation strategies, such as creating a tiered withdrawal system to ensure sufficient liquidity while maintaining a diversified investment portfolio to manage investment risk. Regular portfolio rebalancing can help maintain the desired asset allocation. Also retirees should seek professional advice to refine their strategies based on their unique circumstances. By balancing these risks, retirees can enhance their financial security and peace of mind.