BALANCING RISK IN RETIREMENT
Five Big Threats to a Secure Retirement
BALANCING RISK IN RETIREMENT
If You Think You Are a ‘Conservative’ Investor...Think Again
Brought to you by:
Daniel Betzel, J.D., R.F.C. CRD #4541719
Balancing Risk in Retirement Risk management is a fancy term that describes decisions you make every day. Here are a few examples: ▷ Because your feet could become wet and cold, you protect them with socks and shoes. ▷ Because your house could burn in a fire, you buy homeowners insurance. ▷ Because you could be seriously injured in a car accident, you wear a seatbelt. Now, let’s apply this logic to retirement assets. Can you finish this sentence? Because you could lose money in the stock market, you … If you’re unsure of the correct ending to this sentence, the following pages may be enlightening. However, before we explore options for reducing financial risk, let’s take a closer look at what financial risk really is.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
1
What Is Risk? ▷ ▷ ▷ ▷
Risk is the danger you face from unexpected circumstances or unwanted outcomes. Risk can never be completely eliminated: it is ever-present. Once risk is identified, it can be managed. Some financial risks include: stock market volatility, loss of employment, loss of ability to work or loss of a major asset, such as one’s home.
Special Note: One of the most common mistakes retirees and near-retirees make in their preparation for retirement is overexposing their assets to risk. Those who make this mistake often don’t have a “Plan B.” Unexpected circumstances could change the course of your retirement plans.
How to Pro-actively Manage Risk Large companies typically employ risk managers to help them identify and avoid unnecessary risks. Likewise, if you have assets to protect, we recommend you serve as your own risk manager. Start by identifying a list of worst case scenarios. Then, outline the steps you should take to minimize the chance of these outcomes and control the risk. Let’s go over some common financial risk management scenarios:
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
2
Risk #1. Loss in the Stock Market Recommended steps to manage this risk:
▷ Follow the Rule of 100. Subtract your age from 100. The difference is the
approximate percentage of your assets that you may consider holding, based on your risk tolerance, in risk-based investments. You may want to consider using a portion of the rest to purchase guaranteed products, such as fixed annuities, that are backed by the claim-paying ability of insurance companies. For example, a 45-year-old should have no more than roughly 55 percent of his/her assets in risk-based investments, with the remaining 45 percent in less riskier accounts. As you get older, your portfolio should become progressively more conservative.
▷ Consider annuities. Annuities are accounts with insurance companies that are known for guarantees. The basic premise is that you invest your money in an annuity and at a future date, the annuity provides you with several options for drawing income for retirement. Annuities often offer higher potential returns than other “safe” investments while also providing the comfort of a guaranteed minimum return.*
▷ Diversify your investments. At different times in history, certain types of investments became very popular. Remember the dotcom craze in the late 90s? If you had invested all your money in tech stocks back then, you probably saw tremendous gains followed by significant losses. That’s the situation you want to avoid, and you can do so by diversifying investments and adding insurance products across many different asset classes but only those suitable for your particular risk tolerance. *Guarantees are backed by the claims-paying ability of the insurance company.
The Rule of 100 100%
Take your age and subtract it from 100. That gives you the approximate percentage of your portfolio that should be held in risk based investments. The rest should be allocated to fixed or other guaranteed instruments. For example, a 45-year-old should have roughly 55% of his assets in stocks and higher-risk assets, with 45% reserved for cash and secure income options. The idea is that as you get older, your portfolio should become more conservative.
90% 80%
Protected Savings
70% 60% 50% 40% 30%
Risk Money
20% 10% 0%
0
25
50
75
100
Your Age
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
3
Risk #2. Losing Your Job or Your Ability to Work Recommended steps to manage this risk:
▷ Secure paycheck protection insurance. For most working Americans, the ability to earn a
paycheck is THE greatest asset they possess. Without a paycheck, basic necessities like food and shelter quickly become a challenge. It’s a good idea to get an individual disability insurance plan to protect you and your family from the risk of disability due to illness or injury.
▷ Build an emergency fund. Emergencies can place your financial life at risk. To avoid
unexpected financial challenges, it’s imperative that you build a sizable reserve or emergency fund. This money can be used to pay your living expenses in the event of an unforeseeable loss of income or sizable expense. A typical rule of thumb is to have three to six months of fixed expenses in liquid reserve.
▷ Develop passive income sources. Passive income is income that keeps coming in even when
you’re not working. For example, if you own a rental home, you receive rent payments regardless of your employment status. Commission income can be another good example. If possible, look for opportunities to supplement your income with passive sources.
▷ Explore entrepreneurial options. Those who have been through a few corporate restructures
will tell you that the only person you can really rely on is YOU. Corporations and shareholders are fickle. So, if you or your spouse have entrepreneurial yearnings, diversify your employment risk by dipping your toe into self-employment. Start small, don’t give up your day job and see what develops.
▷ Stay networked. Keep learning, take classes in your field, stay on top of trends, attend industry events, participate in social media groups and keep in touch with other people in your industry. These relationships can help you find a new opportunity easily if you ever need one.
▷ Use credit wisely. Every penny you put on your credit cards that isn’t paid off each month is a
loan that must be paid back – with interest. When you can’t control your credit card debt you face the possibility of losing your credit. That means you may have a difficult time getting future loans when you may really need them.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
4
Remember that not making a decision is making a decision. It’s a decision to put others in charge.
Five Big Threats to a Secure Retirement - Balancing Risk In Retirement
5
Risk #3. Making Uninformed Financial Decisions
(or No Decision At All)
Recommended steps to manage this risk: ▷ Review and update your financial situation every year. Inactivity can hurt you! For example: Bob named his spouse as the beneficiary on his IRA. Over the years, he divorced and remarried. Then he unexpectedly passed away with his ex-wife standing first in line to inherit his retirement account. (This hypothetical example is for
illustrative purposes only and should not be used as the basis for any specific financial decision.)
▷ Create a business succession plan. Assumptions and poor planning have hurt some family businesses. Do your children want to run your business? Are they capable? Put a proactive plan in place before you retire. ▷ Resist the urge to over-react. Hundreds of thousands have been lost due to hasty decisions. For example, Shelly was scared about the recession so she liquidated all her investments and put them into a money market account at the bank where they have languished. Her friend John heard that China has the fastest growing economy on earth, so he moved all his money into overseas investments. These are examples of overreacting. (This hypothetical example
is for illustrative purposes only and should not be used as the basis for any specific financial decision.)
▷ Remember that not making a decision is making
a decision. It’s a decision to put others in charge. For example, if you don’t have a will, state laws will determine who inherits your estate. Consult an attorney to discuss what your options are. If you don’t like that idea, you have to DO SOMETHING.
Risk is unavoidable but it can be managed. You can make intelligent decisions that will help to protect yourself from every form of risk except one – that is the risk of taking no action. The sooner you seek professional help in getting your questions answered the sooner you can begin to reduce the risks you face right now. Start today by scheduling a no obligation strategy session to discuss your specific situation.
81 Mill Street Suite 300 Gahanna, Ohio. 43230 (614) 472-4510 • [email protected] Fee based financial planning and investment advisory services are offered by: Betzel Wealth Advisors, LLC A Registered Investment Advisor in the State of Ohio.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
6
BALANCING RISK IN RETIREMENT
If You Think You Are a ‘Conservative’ Investor...Think Again
Brought to you by:
Daniel Betzel, J.D., R.F.C. CRD #4541719
Balancing Risk in Retirement Risk management is a fancy term that describes decisions you make every day. Here are a few examples: ▷ Because your feet could become wet and cold, you protect them with socks and shoes. ▷ Because your house could burn in a fire, you buy homeowners insurance. ▷ Because you could be seriously injured in a car accident, you wear a seatbelt. Now, let’s apply this logic to retirement assets. Can you finish this sentence? Because you could lose money in the stock market, you … If you’re unsure of the correct ending to this sentence, the following pages may be enlightening. However, before we explore options for reducing financial risk, let’s take a closer look at what financial risk really is.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
1
What Is Risk? ▷ ▷ ▷ ▷
Risk is the danger you face from unexpected circumstances or unwanted outcomes. Risk can never be completely eliminated: it is ever-present. Once risk is identified, it can be managed. Some financial risks include: stock market volatility, loss of employment, loss of ability to work or loss of a major asset, such as one’s home.
Special Note: One of the most common mistakes retirees and near-retirees make in their preparation for retirement is overexposing their assets to risk. Those who make this mistake often don’t have a “Plan B.” Unexpected circumstances could change the course of your retirement plans.
How to Pro-actively Manage Risk Large companies typically employ risk managers to help them identify and avoid unnecessary risks. Likewise, if you have assets to protect, we recommend you serve as your own risk manager. Start by identifying a list of worst case scenarios. Then, outline the steps you should take to minimize the chance of these outcomes and control the risk. Let’s go over some common financial risk management scenarios:
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
2
Risk #1. Loss in the Stock Market Recommended steps to manage this risk:
▷ Follow the Rule of 100. Subtract your age from 100. The difference is the
approximate percentage of your assets that you may consider holding, based on your risk tolerance, in risk-based investments. You may want to consider using a portion of the rest to purchase guaranteed products, such as fixed annuities, that are backed by the claim-paying ability of insurance companies. For example, a 45-year-old should have no more than roughly 55 percent of his/her assets in risk-based investments, with the remaining 45 percent in less riskier accounts. As you get older, your portfolio should become progressively more conservative.
▷ Consider annuities. Annuities are accounts with insurance companies that are known for guarantees. The basic premise is that you invest your money in an annuity and at a future date, the annuity provides you with several options for drawing income for retirement. Annuities often offer higher potential returns than other “safe” investments while also providing the comfort of a guaranteed minimum return.*
▷ Diversify your investments. At different times in history, certain types of investments became very popular. Remember the dotcom craze in the late 90s? If you had invested all your money in tech stocks back then, you probably saw tremendous gains followed by significant losses. That’s the situation you want to avoid, and you can do so by diversifying investments and adding insurance products across many different asset classes but only those suitable for your particular risk tolerance. *Guarantees are backed by the claims-paying ability of the insurance company.
The Rule of 100 100%
Take your age and subtract it from 100. That gives you the approximate percentage of your portfolio that should be held in risk based investments. The rest should be allocated to fixed or other guaranteed instruments. For example, a 45-year-old should have roughly 55% of his assets in stocks and higher-risk assets, with 45% reserved for cash and secure income options. The idea is that as you get older, your portfolio should become more conservative.
90% 80%
Protected Savings
70% 60% 50% 40% 30%
Risk Money
20% 10% 0%
0
25
50
75
100
Your Age
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
3
Risk #2. Losing Your Job or Your Ability to Work Recommended steps to manage this risk:
▷ Secure paycheck protection insurance. For most working Americans, the ability to earn a
paycheck is THE greatest asset they possess. Without a paycheck, basic necessities like food and shelter quickly become a challenge. It’s a good idea to get an individual disability insurance plan to protect you and your family from the risk of disability due to illness or injury.
▷ Build an emergency fund. Emergencies can place your financial life at risk. To avoid
unexpected financial challenges, it’s imperative that you build a sizable reserve or emergency fund. This money can be used to pay your living expenses in the event of an unforeseeable loss of income or sizable expense. A typical rule of thumb is to have three to six months of fixed expenses in liquid reserve.
▷ Develop passive income sources. Passive income is income that keeps coming in even when
you’re not working. For example, if you own a rental home, you receive rent payments regardless of your employment status. Commission income can be another good example. If possible, look for opportunities to supplement your income with passive sources.
▷ Explore entrepreneurial options. Those who have been through a few corporate restructures
will tell you that the only person you can really rely on is YOU. Corporations and shareholders are fickle. So, if you or your spouse have entrepreneurial yearnings, diversify your employment risk by dipping your toe into self-employment. Start small, don’t give up your day job and see what develops.
▷ Stay networked. Keep learning, take classes in your field, stay on top of trends, attend industry events, participate in social media groups and keep in touch with other people in your industry. These relationships can help you find a new opportunity easily if you ever need one.
▷ Use credit wisely. Every penny you put on your credit cards that isn’t paid off each month is a
loan that must be paid back – with interest. When you can’t control your credit card debt you face the possibility of losing your credit. That means you may have a difficult time getting future loans when you may really need them.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
4
Remember that not making a decision is making a decision. It’s a decision to put others in charge.
Five Big Threats to a Secure Retirement - Balancing Risk In Retirement
5
Risk #3. Making Uninformed Financial Decisions
(or No Decision At All)
Recommended steps to manage this risk: ▷ Review and update your financial situation every year. Inactivity can hurt you! For example: Bob named his spouse as the beneficiary on his IRA. Over the years, he divorced and remarried. Then he unexpectedly passed away with his ex-wife standing first in line to inherit his retirement account. (This hypothetical example is for
illustrative purposes only and should not be used as the basis for any specific financial decision.)
▷ Create a business succession plan. Assumptions and poor planning have hurt some family businesses. Do your children want to run your business? Are they capable? Put a proactive plan in place before you retire. ▷ Resist the urge to over-react. Hundreds of thousands have been lost due to hasty decisions. For example, Shelly was scared about the recession so she liquidated all her investments and put them into a money market account at the bank where they have languished. Her friend John heard that China has the fastest growing economy on earth, so he moved all his money into overseas investments. These are examples of overreacting. (This hypothetical example
is for illustrative purposes only and should not be used as the basis for any specific financial decision.)
▷ Remember that not making a decision is making
a decision. It’s a decision to put others in charge. For example, if you don’t have a will, state laws will determine who inherits your estate. Consult an attorney to discuss what your options are. If you don’t like that idea, you have to DO SOMETHING.
Risk is unavoidable but it can be managed. You can make intelligent decisions that will help to protect yourself from every form of risk except one – that is the risk of taking no action. The sooner you seek professional help in getting your questions answered the sooner you can begin to reduce the risks you face right now. Start today by scheduling a no obligation strategy session to discuss your specific situation.
81 Mill Street Suite 300 Gahanna, Ohio. 43230 (614) 472-4510 • [email protected] Fee based financial planning and investment advisory services are offered by: Betzel Wealth Advisors, LLC A Registered Investment Advisor in the State of Ohio.
Five Big Threats to a Secure Retirement - Balancing Risk in Retirement
6
