Smart Moment 5
How Much Market Risk Can You Afford in Retirement?
How much of your retirement portfolio could you afford to lose without changing the way you live? That's a question I wish more investors would ask.
Most investment discussions focus on how much return someone wants.
"We need 7%." "We want 8%." "We need to beat inflation."
Those are reasonable conversations. But there is another side of the equation.
What happens if the market goes the other direction?
Let's say your retirement plan requires you to withdraw $60,000 a year. Now imagine your portfolio falls 25%.
• Would you continue taking the same amount?
• Would you reduce your spending?
• Would you postpone a trip?
• Would you sell investments?
• Would you become uncomfortable enough to change your entire investment strategy?
Your answers tell us something about your actual risk tolerance.
Risk tolerance isn't just a questionnaire
Most financial institutions have a risk questionnaire. You've probably filled one out. (We use a program called Nitrogen that may sound familiar.)
"How would you react if your portfolio declined 10%?" "How would you react if it declined 20%?"
Those questions can be useful. But I believe retirement planning requires more.
We need to understand how a market decline could affect the actual financial plan.
That's why we start with the plan.
At Benchmark Financial Design, we believe the portfolio should be designed around our relationship’s circumstances. These include:
• Income needs.
• Time horizon.
• Other sources of income.
• Assets.
• Taxes.
• Goals.
• AND the ability to withstand market volatility.
Once we understand those things, we can have a much better conversation about investment risk.
A question for you
If your portfolio declined 25% tomorrow, would your retirement plan still work?
If the answer is yes, that's reassuring. If the answer is no, that doesn't necessarily mean you need to abandon the market.It may simply mean your plan deserves another look.
A Smart Moment takeaway
The right amount of investment risk isn't necessarily the amount that produces the highest expected return. It is the amount of risk that makes sense for your financial life.
That's an important distinction.
See the full blog here: Email link https://conta.cc/3U8DiLo