Capital Preservation and Why It Matters


You may have heard of capital preservation strategies at some point or another when planning for retirement. But what is capital preservation exactly? What could it mean for your overall financial plan?  

Here’s a quick look at what capital preservation involves – and why it becomes more important as people move into retirement and beyond.

What Is Capital Preservation?

In a nutshell, capital preservation is a kind of financial strategy that aims to minimize the risk of loss in your investments. It emphasizes the protection of your money, or “principal protection,” as it’s known in more formal terms.  

A well-known rule of thumb in finance is how there is an inverse relationship between risk and reward – or how much risk you take on in order for your money to have more growth potential.

Since capital preservation is focused on protecting your money, this brings up certain questions. By adopting a capital preservation strategy, does this mean that your portfolio won’t grow any more over time?

Thankfully, the answer to that is no. That said, the rate of growth will vary depending on what makes sense for your risk tolerance, personal situation, and timeline until retirement.

What is the Purpose of Capital Preservation?

Capital preservation strategies are used to ensure that the original amount of money that you saved for retirement remains intact.

In 2008, people who were ready to retire had their plans uprooted. In many cases, they had to keep working because their retirement accounts took a big hit. They waited until their accounts had recovered and they were back to even.   

As folks mature in age, preserving savings and assets becomes more crucial. Your timeline for recovery from a loss is shorter, and even then, there isn’t a guarantee that your money will get back to even (although historical market data shows it often works out).

There is higher potential for sequence risk to kick in at an unpredictable time and throw your retirement plan off. As a result, financial planning experts generally recommend taking some risk off the table with aging.  

You will need this money in retirement for income and other goals. If you are ten years or less from retirement, then capital preservation should arguably be one of your primary investment objectives.

You don’t have a long time to make up for market losses at this point. So, it’s prudent to start shifting from a growth-oriented strategy to a refined strategy that protects your money and that will generate dependable retirement income.

What Sort of Vehicles Are Used for Capital Preservation?

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There are many different types of financial instruments that can be used for the goal of capital preservation. These include:

  • Treasury securities
  • Certificates of deposit (CDs)
  • Municipal bonds
  • Corporate bonds
  • Fixed annuities
  • High-yield savings accounts
  • Money market accounts

Treasury securities are bills, notes, and bonds. They are backed by the U.S. government, and they work in different ways. Your money can earn interest in these vehicles in a variety of ways, and they also mature at different time periods.

Bonds are an instrument for saving with little risk. Government bodies or companies issue them. When you buy a bond, your money is put into an account and held there for a certain time. Once that time has passed, your principal and some interest earnings are paid back to you.

CDs are another low-risk saving tool. You can buy a CD at a bank or credit union. Your money stays within an account for a certain period, and once it’s up, your principal is given back to you along with some interest.

High-yield savings accounts tend to pay more interest than you find in traditional savings accounts. You can often have a higher yield for your money at online banks or credit unions.

Fixed annuities are an insurance product that guarantees not only your principal, but also a minimum interest rate that your money will earn. These vehicles usually pay interest that is slightly higher than CDs or Treasury securities.

Money market accounts are another type of deposit account at banks or credit unions. Your deposit earns interest over time. Money market accounts at banks are generally backed by the FDIC. For money market accounts at credit unions, the NCUA provides insurance coverage.

What if you are looking for options that preserve your principal but still give growth potential above certain minimum interest rates? Then fixed index annuities might be something to look into.

They are also an insurance product and let your money earn interest that is tied to an underlying benchmark index, such as the S&P 500 price index. A fixed index annuity protects your principal as well, and in exchange for that benefit, the interest-earning potential has some limits.

Why Is Capital Preservation Important for Retirement?

It’s likely that the money you have saved for retirement is one of your biggest assets.

As a result, you won’t want to risk losing some, or all of it, due to unpredictable market downswings.

There are many vehicles that can get you a competitive rate of return without risking your principal today. Depending on your situation and needs, chances are you have several options at your disposal.

Whatever you choose to do or not do, it’s good to be aware of the possible risk that you are taking with your money.

Would it be possible to lose almost half of your investments in the market? If so, can your portfolio weather that kind of loss?

For most investors who are at or near retirement, the answer is no. Consider speaking with your financial professional about your options for shifting from long-term growth and more towards capital preservation at this point.

You will need the money that you have built up to generate enough income to support your lifestyle in retirement. Even bond mutual funds and individual bonds come with some risk. They are subject to interest rate risk.

Your financial professional can go over the possible risks that you may be taking with your money after you retire. There are risks to capital preservation strategies on the other hand, too.

For one, inflation can add up over time, overtaking the interest that your money earns. This is why it’s important to have a diversified retirement strategy. Your financial professional can talk about ways to offset risks to capital preservation (and risks for other parts of your plan).

Who Else Could Benefit from Capital Preservation Strategies?

Besides retirees, those who are near retirement can benefit from capital preservation. It helps them preserve money or capital that they will use for future retirement income. Capital preservation can also be useful for those with a low risk tolerance.

Bottom-line, anyone who is looking to preserve their savings while generating as much income from it as possible can benefit from this type of strategy.

Talk to your financial professional today to find out more about how you can preserve the capital that you have worked so very hard to save over time. What if you are looking for someone to walk you through your options? For your convenience, many independent financial professionals are available at to assist you.

Get started with our “Find a Financial Professional” section and connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.

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