The Importance of Risk Management for Retirees
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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:
Answers
Explanations
Click on the arrows to vote for the correct answer
A. B. C. D.B
The correct answer is B. A combination of current income and capital preservation strategy.
Explanation:
The 65-year-old investor is nearing retirement and will soon not have the earning power to recover from investment losses. Therefore, the investor will want less risk exposure than the 25-year-old investor. Additionally, depending on the income from social security and pension plan, the investor may need some current income from the retirement portfolio to meet living expenses.
The investor can be expected to live an average of another 20 years, so protection against inflation is necessary. Inflation reduces the purchasing power of the investor's retirement income. Therefore, the investor will want to choose a strategy that provides protection against inflation.
A risk-averse investor will prioritize capital preservation, which involves preserving the value of the principal investment by investing in low-risk securities such as bonds and cash equivalents. This strategy focuses on minimizing losses and preserving the investor's capital.
Additionally, the investor will want to generate current income to meet living expenses. Current income is the income generated by the investments in the form of interest, dividends, and rent.
Therefore, a combination of current income and capital preservation strategy is the best choice for a risk-averse investor who is nearing retirement and needs protection against inflation. The combination of these two strategies will provide the investor with a reliable stream of income while preserving the value of the principal investment.
