How to Determine the Right Amount of Risk in Your Retirement

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    Golden Reserve

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It All Comes Down to Want vs. Need 

 Congratulations, you’re the next contestant on The Risk is Right! Guess the right amount of risk for your portfolio and you’ll win a worry-free retirement! So, what’s the right answer? 

The right answer is “it depends.” 

Yes, you read that right: it depends. We’re sorry to say there’s no hard and fast answer. Every person has a different risk tolerance because risk tolerance is an emotional decision. Yet, many retirees want their financial advisor to determine it for them. There’s one small (scratch that, big) problem with that plan: your financial advisor isn’t you. You wouldn’t ask them whether you should marry your spouse, or whether you should move across the country to be closer to your grandchildren. They can share advice, but they can’t decide for you.  

So how do you determine the right amount of risk in retirement? Consider these three important questions: 

1. What do you want and what do you need?

What I want is a vacation home in Hawaii. But what I need is a comfortable retirement.  

That’s an easy example, but you get the idea. The point is that what you need vs. what you want influences the amount of risk you should take. Returning to the tropical beach house example, if you had a higher risk tolerance, you might decide to stick with riskier investments, chasing a higher yield that could help make your Hawaiian dreams a reality. 

But what if the market crashed, as it has before (looking at you 2008), and suddenly, not only is your Hawaii dream shattered, but so too is your comfortable retirement? You didn’t need the beach home, but you did need a comfortable retirement and now that’s gone. There’s not enough time to re-earn the money you lost. 

2. How important is peace of mind?

That brings us to our next question. What is peace of mind worth to you? Let’s consider both ends of the spectrum. 

Say you think peace of mind in retirement is paramount. You want to unplug in retirement and not have to think about money. You shift into investments with little to no risk. You know exactly how much you’ll have in retirement, and so long as you’ve adequately prepared for the biggest risks in retirement, the amount you’ll have should be fairly predictable. 

On the flipside, you could decide you’re ok with less security if there’s a possibility of greater financial reward. Maybe you’re less worried about the prospect of going back to work if you must or having to adjust your standard of living in the later years should your investments not perform as you’d hoped. Your gamble could pay off, but there are no guarantees. The only thing that’s certain is that you must be comfortable with what happens if your bet doesn’t pan out. 

3. What percentage of loss or growth would change your life in a meaningful way?

Sometimes it’s hard to truly conceptualize what’s at stake when we talk about risk, so it can be helpful to put into more concrete terms. For example: 

“If my 401k grew 20% would that change my life in a meaningful way?” 

“What would happen to my quality of life if my 401k decreased by 50%?” 

For the middle class, these questions are crucial. For the ultra-wealthy, gaining 20% is great; losing 50% probably isn’t that big of deal. They can afford to take larger risks and roll with the potential losses. For the rest of us, there’s usually not enough upside. 

Again, there are no right or wrong answers to these questions. It’s truly a listen to your gut situation. And while no one can make the decision for you, getting all the facts can help you feel more confident in your position. At Golden Reserve, our retirement planners can model your portfolio’s performance in the event of an economic downturn so you can see what’s really at stake. Set up a no-obligation, no-cost consultation to get started. 

Are you asking your financial planner the right questions?


Download our guide "6 Questions to Ask Before choosing Your Retirement Planner" and find out.


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