Trading in Retirement: To Be Feared or Revered?

The potential to earn extra income when a regular paycheck no longer comes may make the prospect of trading during retirement seem alluring. For retirees looking to protect and grow the savings they worked hard to build, market risk matters—just as it does for any trader. But retirees also should consider longevity risk, as in outliving your assets.

And, then there is inflation risk. This potential retirement savings spoiler may require some portion of a nest egg dedicated to inflation-protected or growth investments that might out-muscle inflation. Even with very low rates of inflation, say 3% a year, a retiree could lose half his or her purchasing power over two decades.

An expert weighs in on managing trading risk in retirement

Retirees are living longer and shouldering rougher stretches of market swings. That means risk is to be revered, yes. But feared? No. With risk comes opportunity, especially when managed with the increasing variety of investments, charting, data, and market access—including mobile trading—that’s available to retail investors.

As an active trader, JJ Kinahan, Chief Strategist at TD Ameritrade, identifies and lassos risk every day, even when trading in his own retirement portfolio. Here he answers some questions on balancing risk, returns, and more during retirement.

Q: What are your thoughts on understanding, managing, and ultimately embracing risk, even as investing goals change with age?

JJ: I think the key word when it comes to risk is “define.” If you define how much risk there is in any trade before placing the trade, then the rest is significantly easier. Understanding what might happen—the worse-case scenario—allows you to more intelligently allocate money for each trade, and make sure you have a true picture of risk and reward in your portfolio.

Q: How can trading plans and risk management skills transfer to the unique challenges of retirement investing?

JJ: Risk management fits into anything with money and planning. Very simply, you ask yourself: “What is the true amount of money at risk? What is a realistic return I might expect?” If you answer these two questions honestly it makes investment decisions much easier.

Q: Retirement investing often centers on income—and for good reason. There is a need for a different kind of paycheck during the golden years. But there are many reasons that traders and investors might remain active in markets and aim to grow their trading portfolio throughout retirement: longevity demands, easier access and reliability for retail traders, an uncertain track record for markets without alternatives in the mix. What are a couple of strategies to consider when looking for ways to supplement retirement income?

JJ: As retirees look at an environment where 10-year Treasury interest rates are sitting close to 2%, there is probably a need to enhance income. Very few models built in such a low rate for such an extended time frame. And even if the Federal Reserve kicks in a higher rate policy this year, rates will probably remain historically low for an extended period. Strategies with defined risk and with a potential for return enhancement can look attractive in ultra-low interest-rate environments—and while not for everyone, option traders might even consider strategies such as the covered call or cash-secured put as potential solutions. Low rates may dominate the current situation, but that simply reminds us that no matter how close we are to retirement, market conditions may not be exactly what we were banking on.

With 30 years of experience, JJ Kinahan knows a thing or two about trading—including the potential risks and rewards of trading in retirement. To get regular insights from him on market trends and events, check out The Market Update.