Why Your Risk Tolerance Could Make or Break Your Retirement Plan

Personalized Retirement Planning | by Jules Buxbaum | Friday, March 07, 2025

Risk tolerance retirement is more important than many people realize. If you find yourself constantly worried about market dips or tempted to chase high-flying stocks, the way you handle risk could decide whether your nest egg thrives or shrinks.

One common misstep is ignoring how your comfort with volatility might change over time. For deeper insights into typical pitfalls, see our Common Mistakes to Avoid When Planning for Retirement.

Measuring Your Willingness to Face Market Volatility

Risk tolerance refers to your emotional and financial capacity to endure swings in your portfolio’s value. It’s shaped by your personal comfort with uncertainty, past investment experiences, and current financial obligations.

According to a study by FinaMetrica, only 7% of individuals have a high tolerance for risk, while 65% occupy the middle ground and 28% are low-risk investors (1). This statistic suggests most people fall into the moderately conservative zone. During working years, you might be fine with mild ups and downs. In retirement, though, those dips feel more personal because you’re not adding steady new contributions to offset losses.

What Exactly Is Risk Tolerance?

Risk tolerance is the combination of your willingness and ability to take financial hits in pursuit of higher returns. For some, a 20% portfolio drop sparks panic; for others, it’s a tolerable bump in the road.

Your emotional side responds to headlines and portfolio balances. If a downturn causes you sleepless nights, you may hold too many stocks. On the financial side, if you don’t have other income sources, you can’t afford reckless investments.

Risk Tolerance vs. Risk Capacity

These two concepts often get confused. Risk tolerance is your psychological comfort zone, while risk capacity is how much loss your finances can handle. A retiree with a big pension might “afford” more volatility even if they feel uneasy about stock swings. Conversely, someone who’s uneasy but has significant future earnings may still hold more equities than someone who is done working and has minimal savings.

Aligning both tolerance and capacity protects you from regretful decisions. If your emotional side says “no more risk,” but your finances demand growth, you might need better education or guidance rather than simply shifting to only bonds.

The Real Impact of Risk Tolerance on Retirement Planning

Your willingness to accept volatility can determine which tools you use and how you manage them. This is especially significant once you stop working, given the potential for fewer chances to bounce back from market downturns. The U.S. retirement market surpassed $40 trillion in total assets in 2025 (2), but how you invest that money remains a personal choice.

Asset Allocation

If you have a high tolerance for drops, you might hold a heftier portion of equities to pursue growth. A conservative investor could lean on bonds, certificates of deposit, or other safe vehicles. Yet focusing too heavily on stable assets can stifle returns and put you at risk of outliving your savings.

Balancing positions across stocks, bonds, and cash creates a buffer against big losses. To see ways to mix various asset classes, check out our guide on how to diversify your portfolio for long-term success. This approach reduces the impact of a single investment's ups and downs.

Retirement Income Strategies

Risk tolerance also shapes how you draw down your nest egg. A risk-tolerant person might adopt flexible withdrawal rates and allow for bigger spending in bull markets, then rein it in if downturns linger. A conservative person may use guaranteed products, such as annuities, to stabilize income.

Still, failing to invest in some growth can lead retirees to deplete savings faster than anticipated. Inflation also demands attention; if you don’t allow for enough growth, the cost of living may rise faster than your fixed returns.

Misconceptions About Age-Based Glide Paths

Many people follow the belief that they must reduce stock exposure automatically as they age. While this might fit certain lifestyles, 2Pi Financial’s perspective is that future earnings—and not just age—should be the real determinant of how much risk you assume.

Glide paths commonly shift a portfolio into conservative assets during later years without checking an individual’s actual capacity or goals. If you’re still receiving significant wage income, or if you own a business, you might keep a healthier equity mix even at 65. Likewise, if you’re young but have sizable wealth and minimal future labor income, you might not need so much market risk.

In fact, a 2025 MFS Investment Management survey found only 36% of pre-retirees are confident in their target retirement date (3). Strategies that revolve strictly around age-based allocations could be overlooking the unique aspects that drive each person’s portfolio needs.

For a deeper look into potential pitfalls of automatic formulas, see our discussion of hidden risks of target-date retirement funds. A “one-size-fits-all” approach may not capture the real economic factors of your life.

How 2Pi Financial Approaches Risk Tolerance

At 2Pi Financial, we believe that every client’s allocation should align with their unique circumstances. We acknowledge that many individuals need equity growth for a truly comfortable retirement. Past market data suggests that stocks typically outpace other asset classes over decades, despite inevitable downturns along the way.

2Pi’s Financial Planning Engine

Our core service includes a proprietary tool that lets you test different scenarios in real time. You can explore how changing your retirement age, savings rate, or allocation to equities might affect your plan’s probability of success. To see it in action, watch the quick tutorial on our Two Pi Financial Planner.

It walks you through essential data points, recommends asset mixes based on risk capacity, and highlights critical shortfalls. The tool also adjusts for inflation, so you’re not caught off guard by higher living costs down the road.

Adjusting Risk as You Approach Retirement

Many retirees begin to worry about preserving capital once they stop receiving paychecks. The key is finding a balance between growth and stability. If you’re within five years of exiting the workforce, you may want to modulate risk but still keep some growth potential to combat longevity risk.

It’s also wise to consider how withdrawals might amplify volatility. A steep market drop combined with an abrupt need to pay living expenses can eat into your portfolio quickly. To dig deeper into ways of lowering volatility without sacrificing your future, take a look at our guide on how to reduce investment risk as you get closer to retirement.

Answers to Common Questions About Risk Tolerance

Understanding how risk tolerance fits into the broader retirement picture can alleviate doubts and help you make confident decisions. Below are brief responses to frequent inquires.

1. How does risk tolerance affect retirement planning?
Your risk tolerance influences asset allocation, investment choices, and how you handle market volatility. It also ties into savings rates, since a highly conservative portfolio often requires more saved dollars to reach the same goals.

2. Is there an ideal risk tolerance for everyone?
No single level applies to everyone. Factors like age, future earnings capacity, personal comfort with losses, and existing wealth make the answer unique. Your tolerance may also shift if your health status or family circumstances change.

3. Can risk tolerance change over time?
Yes. Life events such as retirement itself, health updates, or inheritances can alter your view toward market swings. Economic downturns also affect how confident you feel about risky assets.

4. What if my risk tolerance is too low?
A highly cautious stance can backfire by limiting growth. If your assets earn less than the rate of inflation, you risk a decrease in buying power. Education and guidance may help you accept moderate risk for better long-term outcomes. If you remain extremely averse, you might need a higher savings rate or a longer timeframe before retiring.

5. Should I let my age decide my allocation?
Age alone is misleading. While younger investors often have more time to rebound from losses, you should really focus on factors like future wage potential and whether you plan to keep working part-time in retirement. If your financial cushion is large, age-based formulas may not be the best approach.

What This Means for You

Owning a portfolio that fits your comfort level is vital to staying calm during market drops. However, steering too far into “safe” territory might strangle the long-term growth you need to outlast inflation and support a fulfilling lifestyle. Finding the sweet spot between growth and preservation is the real key.

Before you finalize any retirement plan, remember that inflation is always a lurking threat. To understand its corrosive effect, explore our resource on understanding inflation risk in retirement savings.

There’s no perfect formula that calculates how much risk you should bear. Yet by knowing yourself, outlining your income needs, and staying open to informed adjustments, you can create an investment strategy that lasts. Higher returns can be worth the ride if you pair them with a stable safety net. On the other hand, being too safe may leave you short when it matters most.

References

(1) FinaMetrica. “Risk Tolerance Study.” Available at: https://www.morpher.com/blog/understanding-risk-tolerance

(2) T. Rowe Price. (2025). “2025 Retirement Market Outlook.” Available at: https://www.troweprice.com/content/dam/retirement-plan-services/pdfs/insights/retirement-market-outlook/2025\_RMO/2025\_Retirement\_Market\_Outlook.pdf

(3) MFS Investment Management. (2025). “Retirement Outlook Survey.” Available at: https://www.mfs.com/en-us/investment-professional/insights/retirement-insights/retirement-outlook.html