Breaking Down Risk Tolerance

Whether you're 30 or 60, risk tolerance is an important part of the picture for retirement savers. Here are the basics that all investors should know.

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There is no shortage of discussion surrounding the important topic of risk tolerance. It is crucial for everyone to know the basics. It is just as crucial to show discipline and rigor when it comes to adhering to the path you choose.

Here are a few of the fundamentals:

The younger you are, the more time you have, and therefore the more risk you can adopt. Retirement savers in their 20s and 30s have 30 to 40 years before they’ll need to tap retirement accounts, so they should accept more risk. If they do, it demands patience during the down markets. Younger investors may go through eight to 16 “bear markets” (defined as a 20% or more drop in the stock market) in their working years. Younger savers can prepare for these down markets by building a six- to 12-month emergency cash fund (in case of job loss), and psychologically preparing themselves for the inevitable rough patches.

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Periods of market downdraft should be embraced by the younger investor, because their retirement savings contributions are essentially purchasing investments “on sale.” See my previous article on this subject for a more in-depth discussion of investing and saving during a bear market.

The older you are, the less time you have, and therefore the less risk you can adopt. Retirement savers in their 60s and beyond need to make sure their savings are repositioned to generate income, not aggressive growth. This is not only because they have less time, but also because instead of adding savings into a falling market like they did in their working years, they are taking money out. This can heighten the anxiety in a bear market, and reducing the risk is a way to mitigate it.

This raises the question of whether there’s a rule of thumb for what level of risk is appropriate based on age. One common benchmark states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. For a 30-year-old, it would be 70%. Some professionals consider this a bit too conservative and recommend using 110 or even 120 in the formula instead. Under that thinking, a 60-year-old would want 50% or 60% of their portfolio in stocks, and a 30-year-old would want 80% or 90% in stocks. The important decision is picking a path and being patient and disciplined over the years.

There are a variety of tools to help evaluate your own risk tolerance and available investment options to help put you on the right track. Here are a few of them:

  • Calculators: There are many different “risk tolerance calculators” available for free online. Spending some time researching and playing with three or four can help provide investors with some guidelines and ideas.
  • Target Retirement Date Funds: Most retirement plan custodians offer this “auto-pilot” option. You simply choose the date closest to your expected retirement year, and the fund managers will reduce risk as you go through life. For example, a 25-year-old planning on retiring at 65 would choose a Target 2060 fund. A 45-year-old planning on retiring at age 60 might choose a Target 2035 fund. These solutions have become increasingly popular for savers desiring simplicity, diversification and automatic risk reduction over time.
  • Annuities: These investment vehicles may or may not be a good fit for every investor, but those in their 50s and beyond owe it to themselves to become educated on the pros and cons of annuities and make smart decisions accordingly. For risk-averse investors, they may be a compelling path for a portion of their portfolios. For investors who can financially and psychologically accept risk, annuities can be less compelling. A financial professional can help investors navigate the benefits and drawbacks for these products.

Risk is a part of investing. The markets can be frustrating in their unpredictability and volatility, but it is part of the deal. Know your own psychology. While in your working years, if you know you would panic in a down market and exit your investments, you do have an option: Invest more conservatively, but save more because your returns will be lower. In your retirement years, you have a similar option: Invest more conservatively but withdraw less because your returns will be lower.

As always — no two investors are the same, and a financial professional can help you better understand the risk you’re willing to take given your unique circumstances.

The opinions expressed those of the author and do not necessarily represent the opinions of CUNA Brokerage Services, Inc. or its management. This article is provided for educational purposes only and should not be relied upon as investment advice.

*Note: Representative is neither a tax adviser nor attorney. For information regarding your specific tax situation, please consult a tax professional. For legal questions, please consult your attorney.

CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Corporate headquarters are in Madison, Wis. Insurance and annuity products are issued by CMFG Life Insurance Company and MEMBERS Life Insurance Company, 2000 Heritage Way, Waverly, IA. 50677. Variable Products are underwritten and distributed by CUNA Brokerage Services, Inc., member FINRA/SIPC, a registered broker/dealer and investment adviser.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment adviser. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, may lose value, no financial institution guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc., is a registered broker/dealer in all 50 states of the United States of America.


©2019 CUNA Mutual Group


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jamie Letcher, CRPC®
Financial Adviser, LPL

Jamie Letcher is a Financial Adviser with LPL Financial, located at Summit Credit Union in Madison, Wis. Summit Credit Union is a $5 billion CU serving 176,000 members. Letcher helps members work toward achieving their financial goals and through a process that begins with a “get-to-know-you” meeting and ends with a collaborative plan, complete with action steps. He is a member of FINRA/SIPC, a registered broker-dealer and investment adviser.