The Three Real Risks

"Risk means more things can happen than will happen." — Howard Marks, paraphrasing Elroy Dimson

Most people equate investment risk with volatility — the daily lurch of prices. In retirement, that is rarely the thing that ruins a plan. Three deeper risks do the real damage, and none of them shows up on a single day's screen.

The first is inflation. Over a thirty-year retirement, rising prices quietly halve the spending power of a fixed income. A pot that feels safe in cash is steadily losing ground.

The second is longevity — the risk of living longer than your money. It sounds like good news, and it is, but a plan built for twenty years that has to stretch to thirty-five can run dry at the worst possible time.

The third is sequence-of-returns: the order in which good and bad years arrive. A market fall in the first few years of drawing an income does far more harm than the same fall later, because you are selling assets while they are down.

Illustrative example: planning for the right enemy

Guarding only against day-to-day volatility — by sitting in cash — actually feeds the first two risks. The better defence is a diversified, partly equity-tilted pot, a sensible spending rule, and a cash buffer for the early years. Name the real risks, and the plan almost designs itself.