I’m always amazed at the number of new clients who come in not knowing how much of their portfolio is at risk.
Time and again, we’ll find that people never made the switch from the accumulation phase of their investment cycle to the preservation phase that is so important in retirement. They’re taking a lot more risk than they realize — and much more than they actually want.
So, one of the first things we’ll do is perform a risk assessment on their current holdings. They’ll tell us, “I don’t want to lose more than 5% to 10%,” but when we get the analysis back, we’ll see they’re at risk of losing 20%, 30% or even 40%.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Once they get over the shock, they’re ready to learn about volatility and what it can do to their portfolios — specifically in retirement, when they’re depending on those investments for income. That’s when market risks represent the potential loss of funds, which can have an impact on the retirement lifestyle they dreamed of for years.
Volatility isn’t as much a concern during those accumulation years. If you’re 35 and the market takes a tumble, you’ve got plenty of time — decades, in fact — to recover before you’re ready to retire. But when you’re actually in retirement, volatility definitely becomes a significant concern.
A major reason for that concern, of course, is you no longer have all those years of potential recovery time ahead of you to counteract anything that goes amiss. If the market takes a big dip, you have less chance of recovering, and that may mean you’ll need to change your spending habits and how much you’re withdrawing from your accounts to live on.
Some people might argue that volatility also involves some big gains in the market to counter those big losses. Won’t it all even out in the end?
Not necessarily.
If you have $100,000 invested and take a 30% loss one year, a 30% gain the next year won’t even get you back to square one. That 30% loss dropped you to $70,000. That 30% gain brought you to $91,000, still $9,000 below where you started.
Another factor comes into play when you’re already retired. At that point, you also may be withdrawing money from some of your accounts to handle your daily living expenses and enjoy your retirement. A big drop in a volatile market — combined with your withdrawals — makes it even more difficult to keep things steady on your financial side.
It may be time to take a real hard look at the amount of risk you have in your portfolio by having a professional do a risk analysis for you and determine whether you’re taking too much risk, being too conservative or playing it just about right.
The result could be eye opening — and it also could provide much-needed information that will help you make better investment choices going forward.
Andrew Montgomery Costa is the co-founder and managing director of Global Wealth Management (www.askglobalwealth.com). He is a co-author of The Ultimate Success Guide and the co-host on radio’s The Global Wealth Show.
Ronnie Blair contributed to this article.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
Should I Buy Stocks or Should I Buy Bonds Right Now?Generally speaking, stocks provide reasonable growth while bonds provide stable income. Each play important roles in diversified portfolios.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial PlansFinancial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around YouWhile thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
