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Featuring a 17-Minute Educational Video with Blair Tushaus

When markets feel uncertain, a lot of investors feel like they only have two choices: stay fully exposed to the market roller coaster or move to something “safe” and potentially give up meaningful upside. I do not think those are the only choices.

The specific headlines change over time, but the retirement planning question stays the same: how can you stay invested without taking more downside risk than your plan can comfortably handle?

That is where defined investment solutions come in. These are strategies where we define the playing field in advance: what we are following, how long we are following it, how much downside exposure we are willing to accept, and how the upside may work.

For pre-retirees and retirees, that matters. If your portfolio needs to last 20, 30, or more years, large drawdowns can be more than frustrating. They can change the plan. So today, I want to walk through the basic building blocks of defined investment solutions and explain why I believe they may be one of the most under-discussed tools in retirement investing.

Key Takeaways

  • Defined investment solutions may help investors set clearer expectations around both downside exposure and upside potential.
  • The four primary components are the underlier, duration, downside protection, and upside participation.
  • A buffer is designed to absorb a stated amount of market loss before the investor participates in additional losses.
  • A floor is designed to limit downside exposure to a stated maximum loss, depending on the terms of the solution.
  • Upside participation is often capped, meaning investors may trade some upside potential for more downside protection.
  • Diversification can go beyond sectors and asset classes; it may also include different indices, time periods, and protection levels.
  • For retirees taking portfolio distributions or required minimum distributions, controlling downside risk may be especially important.

What Are Defined Investment Solutions?

When I talk about defined investment solutions, I am talking about strategies that define the investment outcome range before we invest.

In plain English, we want to answer four questions upfront:

  1. What are we investing in or tracking?
  2. How long are we tracking it?
  3. How much downside protection may we have?
  4. How much upside potential may we receive?

That is the main idea. Instead of simply saying, “Let’s invest in the market and hope it works out,” we are trying to define the space: the potential upside, the potential downside, and the time period in between.

These strategies are not risk-free, and the details matter. Certain products with principal protection or similar language may still carry risks, including issuer credit risk, liquidity risk, fees, and limits on upside participation. Investors should review the specific terms before investing.

The Four Main Components of a Defined Investment Solution

1. The Underlier: What Are We Following?

The first component is the underlier.

Simply put, the underlier is what the solution is tracking. It could be a stock. It could be an index. It could be something like the S&P 500, the Dow, or the Nasdaq.

For many retirement-focused investors, we often look at broad indices because they can provide a clearer reference point. For example, S&P Dow Jones Indices describes the S&P 500 as a large-cap U.S. equity benchmark that includes 500 leading companies and covers roughly 80% of available U.S. market capitalization.

So when people say, “The market went up,” or “The market went down,” they are often referring to one of these broad indices.

2. The Duration: How Long Are We Following It?

The second component is duration.

Duration simply means how long we are going to follow that underlier. It could be three months. It could be twelve months. It could be several years.

This is one of the most underappreciated parts of the conversation.

A lot of investors understand diversification by sector: large cap, small cap, technology, healthcare, energy, and so on. That can still matter. But at Tushaus Wealth Management, we also like to think about diversification by duration.

Why? Because the time period you choose can dramatically change the outcome.

Markets can have sharp drawdowns over short periods and still recover over longer periods. They can also move sideways for frustrating stretches. That is why I believe duration deserves more attention than it usually gets.

3. Downside Protection: How Much Risk Are We Taking?

The third component is downside protection.

This is the part that tends to matter most for retirees and pre-retirees. When you are building assets, volatility can feel uncomfortable. When you are drawing from assets, volatility can become a much bigger planning issue.

That is especially true for people taking retirement distributions or required minimum distributions. The IRS requires minimum distributions from certain retirement plans and accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k) plans.

Defined investment solutions may use different types of downside protection. Two of the most common concepts I talk about are buffers and floors.

4. Upside Participation: What Can We Gain?

The fourth component is upside participation.

This answers the question: “If the market goes higher, how much of that gain may I receive?”

In many defined solutions, the upside may be capped. That means there may be a ceiling on the maximum return you can receive over the defined period.

That tradeoff is the point. You may give up some upside potential in exchange for a more defined downside experience.

How a Buffer Works

Let’s keep this simple.

Imagine a defined investment solution tied to the S&P 500 for 12 months with a 20% buffer.

A buffer is designed to “buff out” losses up to a certain amount. In this example, the first 20% of market losses would be absorbed by the buffer.

So, if the S&P 500 were down 18% over that 12-month period, the 20% buffer would cover that decline in this simplified example. The investor’s return would be 0% before considering fees, costs, taxes, or other product-specific terms.

Now, what if the market were down 25%?

In that case, the buffer would absorb the first 20%, and the investor would be exposed to the remaining 5% loss. So instead of being down 25%, the investor would be down 5% in this simplified example.

That does not mean there is no risk. It means the risk is more defined.

For someone approaching retirement, that difference can matter. If your neighbor is down 25% and you are down 5%, that may create a very different emotional and planning experience.

How a Floor Works

A floor works differently from a buffer.

Think about dropping a ball. How far can it fall? It can only drop to the floor. It cannot go through the floor.

In a defined investment solution, a floor is designed to limit the maximum downside exposure to a stated level.

For example, let’s say we are following the S&P 500 for 12 months and the solution has a 10% floor.

If the market were down 36% during that period, the floor would be designed to limit the downside to 10%, depending on the exact terms of the solution.

Again, this is not the same as saying there is no risk. But it may help define the downside in a way that can make retirement planning more manageable.

Buffer vs. Floor: What Is the Difference?

A buffer is designed to absorb losses up to a certain point.

A floor is designed to set a maximum loss level.

Here is a simple way to think about it:

A 20% buffer may help absorb the first 20% of losses. If the market declines more than 20%, the investor may participate in losses beyond that buffer.

A 10% floor may be designed so that the investor’s maximum loss is limited to 10%, even if the underlying index declines by more than that amount.

Both can be useful. Both have tradeoffs. And both need to be evaluated based on the full terms of the investment.

At Tushaus Wealth Management, we may use different variations of buffers and floors depending on the client’s goals, timeline, risk tolerance, income needs, and retirement plan. It is not always one or the other. More often, we are looking at how multiple positions may work together.

Why Upside Is Often Capped

Now let’s talk about the upside.

If we are asking for downside protection, we usually have to give up something in return. In many defined solutions, that tradeoff shows up as a cap.

A cap is the maximum return available over the defined period.

For example, let’s say we have a 12-month solution tied to the S&P 500 with a 20% buffer and a 15% cap.

If the S&P 500 goes up 18%, the investor would receive 15% in this simplified example. The investor would miss out on the additional 3% above the cap.

Is that frustrating? Maybe.

But the real question is: what are we solving for?

I often ask clients, “What is more likely to keep you up at night: missing some upside, or being fully exposed to a major drawdown right when you need your portfolio to support your retirement?”

Nine times out of ten, the people we meet with are more concerned about the downside. They want to participate in market growth, but they do not want one major market event to derail the ride into retirement.

The Tradeoff: More Protection May Mean Less Upside

Defined investment solutions are all about tradeoffs.

If we want more downside protection, we may have to accept a lower cap.

If we are willing to take less downside protection, we may be able to receive a higher cap.

That is the risk-reward relationship.

For example, a solution with a smaller buffer may offer more upside potential. A solution with a larger buffer may offer less upside potential. Neither is automatically better. It depends on the client, the plan, the time horizon, and the role that investment is supposed to play.

The goal is not to create the most exciting portfolio. The goal is to create a portfolio that can support your retirement plan.

Why This May Matter More in Retirement

When you are retired or close to retirement, the order of returns can matter.

If you experience a major drawdown while also taking distributions, it may put pressure on your portfolio. You may have to sell assets when values are down. You may have less time to recover. You may also feel more pressure to change your plan at the wrong time.

That is why I believe downside protection deserves a seat at the table.

We insure our cars. We insure our homes. We protect many areas of our lives. Yet many investors do not think as intentionally about protecting the assets that may need to support the next 20, 30, or more years of retirement.

To be clear, defined investment solutions are not “insurance” in the traditional sense, and they do not eliminate every risk. I use that comparison because the planning mindset is similar: identify the risk, define how much risk you are willing to take, and build a strategy around it.

A New Way to Think About Diversification

The old-school way of thinking about diversification is usually focused on spreading money across sectors, styles, or asset classes.

That still has a role.

But I believe we also need to think about diversification in a more defined way.

That may include:

  • Different underliers
  • Different durations
  • Different buffer levels
  • Different floor levels
  • Different upside caps
  • Different maturity dates

Instead of relying on one solution to do everything, we may use several defined positions that each play a specific role.

That can potentially create a portfolio where the downside is more clearly understood, the upside is still available, and the client has a better sense of what could happen under different market conditions.

This approach aligns with how we think about investment management and advisory work at Tushaus Wealth Management: customized investment strategies, capital preservation, long-term growth, and risk management techniques designed to reduce exposure to market volatility.

Conclusion

Defined investment solutions may offer a different path forward for retirees and pre-retirees who want to stay invested but do not want to be fully exposed to every market swing. By defining the underlier, duration, downside protection, and upside potential, we may be able to create a clearer retirement investment strategy. If you have questions about how these solutions could fit into your portfolio, I invite you to book a complimentary 1-hour strategy session with our team. There’s no obligation, and it’s completely free.

Frequently Asked Questions

What are defined investment solutions?

Defined investment solutions are strategies that set certain investment parameters upfront. Those parameters may include the underlier being tracked, the length of the investment period, the downside protection level, and the upside potential. The goal is to make the range of possible outcomes more understandable before investing.

Are defined investment solutions guaranteed?

No. Defined investment solutions are not automatically guaranteed, and they are not risk-free. The outcome depends on the specific terms of the investment, the underlier, the time period, costs, issuer creditworthiness when applicable, and other risks. Protection features should be reviewed carefully before investing.

What is a buffer in investing?

A buffer is a downside protection feature designed to absorb a stated amount of loss. For example, a 20% buffer may absorb the first 20% of losses in the underlying index over a defined period. If losses exceed the buffer, the investor may participate in losses beyond that point.

What is a floor in investing?

A floor is designed to limit downside exposure to a stated maximum loss. For example, a 10% floor may be designed so that the investor does not lose more than 10% over the defined period, assuming the investment terms are met. The exact outcome depends on the structure and rules of the specific solution.

Why would I accept a cap on my upside?

A cap is often part of the tradeoff for downside protection. If you want a buffer or a floor, you may have to accept a limit on how much upside you can receive. For many retirees, that tradeoff may be worthwhile if it helps reduce the risk of a major drawdown.

Who might consider defined investment solutions?

Defined investment solutions may be worth exploring for pre-retirees and retirees who want growth potential but are concerned about market volatility. They may also be useful for investors who want more clarity around risk and return expectations. They are not appropriate for everyone, so the strategy should be evaluated within a full financial plan.

How are defined investment solutions different from traditional diversification?

Traditional diversification usually focuses on spreading assets across sectors, asset classes, or investment styles. Defined investment solutions may add another layer by diversifying across durations, indices, buffer levels, floor levels, and cap structures. That can potentially create a more intentional risk-management framework.

How do I know if this fits my retirement plan?

The best way to know is to review your income needs, tax situation, time horizon, risk tolerance, and current portfolio. A defined investment solution should not be selected in isolation. It should support the larger retirement strategy.

Sources

The information presented in this piece is the opinion of Tushaus Group, LLC and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Tushaus Group, LLC is a Registered Investment Advisor.
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