Risk Profiles for Retirement Planning
Question
Assume our typical 65-year-old investor likewise has adequate insurance coverage and a cash reserve. Let's also assume she is retiring this year. This individual will want less risk exposure than the 25-year-old investor, because her earning power from employment will soon be ending; she will not be able to recover any investment losses by saving more out of her paycheck. Depending on her income from social security and a pension plan, she may need some current income from her retirement portfolio to meet living expenses. Given that she can be expected to live an average of another 20 years, she will need protection against inflation. A risk-averse investor will choose a combination of current income and capital preservation strategy; a more risk-tolerant investor will choose:
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A. B. C. D.D
The correct answer is B. A combination of current income and capital preservation strategy.
The 65-year-old investor is in a different life stage than the 25-year-old investor. The 65-year-old is retiring this year and her earning power from employment will soon be ending, which means she will not be able to recover any investment losses by saving more out of her paycheck. Also, she may need some current income from her retirement portfolio to meet living expenses, depending on her income from social security and a pension plan. Given that she can be expected to live an average of another 20 years, she will need protection against inflation.
Therefore, the 65-year-old investor will typically prefer a combination of current income and capital preservation strategy. A capital preservation strategy aims to protect the value of the portfolio from losses, while providing a moderate level of income. This strategy may include investments such as high-quality bonds, cash equivalents, and dividend-paying stocks.
A more risk-tolerant investor may choose a combination of current income and capital appreciation in an attempt to have principal growth outpace inflation. However, this strategy may involve taking more risk, which may not be appropriate for a 65-year-old investor who is seeking to preserve capital and generate income to support living expenses in retirement.
Option A, a combination of current income and capital depreciation in an attempt to have principal growth outpace inflation, is not a suitable investment strategy because capital depreciation means that the value of the investment will decrease over time, which is not aligned with the goal of capital preservation.
Option D, a combination of current income and total return in an attempt to have principal growth outpace inflation, is also not the best strategy because total return strategies typically involve taking on more risk, which may not be appropriate for a 65-year-old investor seeking to preserve capital and generate income to support living expenses in retirement.
In summary, a combination of current income and capital preservation strategy is the most appropriate investment strategy for a 65-year-old investor who is retiring and seeking to generate income, protect capital, and provide inflation protection.
