Risks and How To Protect Your Money & Retirement Income
October is here and Halloween is coming up, which means there are already some yards decorated with some very interesting things…
My son Asher loves to look at it; the spooky houses he calls them.
However, I think there are some other spooky or scary things happening to you. If you’ve been watching the news or paying attention to the markets right now, you’ll know that things are a little volatile. A little spooky, maybe even a little scary.
The question is, “How do you protect your retirement against this spooky, crazy, risky world we’re living in?”
Types of Risk
When we talk about risk to your retirement, oftentimes people just think in terms of market risk, and while that is actually a big risk, there are really four different big types of risks and each one of these types includes multiple risks.
For instance, you have equity risk, which is the risk most of us think or you might say stock market risk.
But in equity risk, you also have currency risk and business risk.
Business risk is if the company you are investing in has an issue. Remember Enron from years and years ago?
The next category is debenture risk, which is relating to bonds, the default risk of bonds, interest rates, and how interest rates will affect bonds.
Then you have purchasing power.
Inflation is a big risk to your retirement and so is what we call the real rate of return.
Oftentimes people tell the average rate of return, but if we are not looking at the real rate of return, which you’re really making, that can be a risk in retirement.
Lastly, we have lifestyle risk, which has to do with income stability. Are you going to have the income you need in retirement? Do you have the liquidity that you need?
Another lifestyle risk is tax risk. Everyone is concerned about that.
Now the 5th category I’m going to add is “bad decisions.” In that bad decision, you could have procrastination, bad managers, making bad emotional decisions – that’s another risk that we could all face.
So how do you protect your retirement?
Everyone wants to have the financial security to be able to do the things they want to do when they want to do it.
But dealing with these different kinds of risks may make feel like you’re walking through a field of landmines.
Over the next few weeks, we’re going to talk about some different ways that you can make sure you’re protecting your retirement as we examine each of these risks.
To start off, the first thing that you can do to protect your retirement is to be sure that you have a coordinated plan.
We did a video not too long ago titled the Four Aspects of Your Financial Life, which includes tax planning, cash flow management, investment positioning, and estate preservation.
If you really think about it, all these risks are also included in those different aspects of your financial life.
If you do one thing in investments, it can affect your income, your taxes, etc.
So having a coordinated plan is the first way that you can make sure you’re protecting and making sure that what you do in one area that you’re considering in another.
This is really where our job as advisors comes in for people trying to bring that all together and coordinate it.
Not that we are the experts in every area, but that we have a team and coordinate with other experts as needed.
So having a coordinated plan I think is the first way.
Stock Market Volatility
How do we protect our money in the market?
I think the first thing I want to highlight is making sure we’ve looked at the colors of money. Where is all of your money located? How much is in yellow money? How much is in green, projected growth money, and how much is in red money?
The stock market risk is only going to affect your red money, so if you are allocated appropriately and you have money in green money, then the stock market risk isn’t as big of a deal to you.
Yes, it might impact your earnings one year, but you’re never going to have a loss in green money due to the market volatility.
If the stock market is great, you make more in green money. But if the stock market is down, you’re not going to lose in green money.
Making sure you have a diversified portfolio over the colors of money is important and we’re going to come back to that and some of these other risks as well.
Let’s look at red money for a second, which is the money we have in the market. How can we protect it?
What’s The Benchmark?
Well, the first thing I want to make sure we always talk about and go back to is what our personal benchmark is.
You can look at the S&P 500 and use that as your benchmark, but really that does you a disservice. What we should be doing is looking at your own personal benchmark and manage according to that.
If you haven’t done this before, now is the time. You’re going to answer four questions to help determine your personal benchmark.
- What’s the average rate of return you’d like to see?
Now it’s important here that you be realistic. Someone said the other day 20%. Well, I’d like to make 20% too, but it’s not very realistic.You hear things from Dave Ramsey where he talks about 12%. But you’d have to go back and be invested for the whole history of the stock market. (which is probably a longer time frame than you want ;)Over the last 10-15 years, 6 or 7% is probably more realistic.So come up with your number but be realistic.
- What’s your “uncle” point?
What’s the most you could lose before it affects you or before you would be sick or before you would be trying to pull your money out.You think about that game as kids, right? Whether you tickle somebody until they say “Uncle” then what’s your uncle pointTurn it into a dollar amount and not just a percentage. What dollar amount would you be down for that to really affect you?
- Which one is more important?
Always earing that average rate of return or would you be willing to settle for less than the average rate of return in order to not take that big of a loss past your uncle point?This is really key.
- What’s the time frame?
Anything you have in red is going to have months, weeks, periods of volatility. Are you going to be looking at this in a day? Are you going to be looking at it in a month or a year?If you’re going to judge things on the day, then being in red money is probably not the best thing for you.
Once you have your personal benchmark, how is it going to be managed and how are your managers going to manage it against those benchmarks?
We have had a lot of calls with our portfolio manager, Guy, on how they manage and what they are doing and they have a lot of different protections in place so that if the market experiences another big crash they’re going to be doing some things to pull money out and not just follow it down.
For example, in 2020, when the market was down 30%, their more moderate portfolios were down maybe 12%.
But because of the things they were doing, within the next month, they were back up. They made some adjustments in a hurry and gained the money back more quickly.
The important thing to know is how your money is being managed. Make sure that you’re not taking too much risk and know that they have protections in place too.
We’re always happy to schedule a call and bring Guy on the line so he can go through how they’re managing accounts.
Or, if your accounts are elsewhere he can kind of do a deeper dive on the risk there on the equity side.
Managing stock market risk, we first want to look at The Colors of Money. Then we want to set a personal benchmark and make sure your accounts are being managed to that benchmark.
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