How Risk Tolerance Shifts in Retirement Investing

Abandonment risk rears its head during every market decline. And it doesn’t affect all investors equally.

The closer investors get to retirement, the more likely they are to pull back when markets show signs of stress. That’s when abandonment risk is most serious — just as investors have the largest balances and the least time to recover from losses.

“The risk of abandonment can show up at the most critical moment for investors,” says Mike Reidy, Client Portfolio Manager at Principal Asset Management. “By the time people near retirement, they’ve not only built up their biggest balances, but they also have the least time to recover from a market pullback.”

Research from Principal Asset Management identifies the “pain points” that can lead to abandonment. Younger retirement participants (aged 25 - 50) can typically tolerate portfolio losses up to 25%. For those approaching retirement (50 - 65), that drops to roughly 14%. For retirees (65+), drawdowns of just 9% can push them to abandon their portfolios. 

While those closer to retirement are most prone to abandoning their portfolio during periods of market volatility, younger investors often react differently. With smaller balances at stake and decades of contributions ahead, they’re more likely to stay invested. 

“Younger investors have a major advantage — time,” says Reidy. “Every market downturn is an opportunity to accumulate wealth at a relative discount without having to worry about retirement spending needs in the near future.”

During periods of market stress during the 2022 downturn, as the S&P 500 fell and bonds suffered double-digit losses, Principal Asset Management research showed younger participants, in aggregate, stayed the course. By contrast, during that same period, participants nearing retirement tilted more defensive and potentially missed out on the strong equity rebound that followed. 

Participants over 50 are twice as likely to abandon their investment strategy as younger investors, and often late in the downturn, when losses are deepest. “It makes sense,” says Reidy. “Larger balances heighten the urge to de-risk in favor of cash-like investments, but exiting markets late can set back long-term goals.”

The impact to retirement savings often deepens when re-entry to the market lags. Many participants who exit don’t return until after the market rebound begins, missing early gains that could fuel a recovery in their portfolio balances. 

For participants nearing retirement, that missed recovery can reduce retirement income by years, changing the trajectory of their savings.

The convergence of the largest balances, shortest time horizons, and heightened sensitivities to losses can create a fragile moment in retirement planning. 

This reality demands portfolio design that accounts for behavioral tendencies. That understanding has shaped the way Principal Asset Management builds its retirement portfolios with abandonment risk in mind. 

“Our glidepath is steeper than peers’, and this is based on data,” says Reidy.

Target-date funds from Principal Asset Management embody this approach: These professionally managed portfolios intentionally de-risk toward fixed income as retirement nears. Target-date funds have about 93% equity exposure for younger investors — but by age 60, that exposure falls to just under 54%. 

The design is deliberate, emphasizing growth early, then defense as retirement approaches to help participants stay invested through inevitable downturns. 

In the end, a successful retirement plan is just more than market performance, it is helping participants stay invested long enough to benefit from it.