Risk Tolerance and Retirement Planning

By on September 11, 2012 in Retirement with 5 Comments

Investments and planning for retirement are a daunting task and in this current economic climate, it is even more important than ever to have the necessary tools to make informed decisions.

If you are concerned that your current retirement plan may have too much risk or you are just plain tired of the fluctuations of the stock market and the risk associated with it, this article may provide you with some simple and straightforward guidance on how to navigate these turbulent times.

Let’s start with “the math” and explain the realities of loss.  If you have $100,000 invested into a mutual fund and that fund experiences a 20% loss, the resulting value on your next statement from the mutual fund company will show an account value of $80,000.

So, will a 20% gain get you back to even? No. Let’s crunch the numbers:

$80,000 x 20% = $16,000

$80,000 + $16,000 gain = $96,000 ($4,000 LESS than your original investment)

A 20% loss followed by a 20% gain does not get you your principle back.  In fact, to regain your original principal balance you will need to get a 25% return ($80,000 x 25% = $20,000; $80,000 + $20,000 = $100,000).

A recent Gallup poll indicated more and more American’s are worried about their investments.  As we get older, our investment time horizon gets less tolerant to market losses due to the amount of time it may take to get a significant double-digit return just to get back our own money.

Therefore, the best defense to market losses is often thought to be proper asset allocation and diversification but what exactly constitutes proper asset allocation?

Frequently investors think that they can reduce their risk through diversification.  As MorningStar suggests, they will invest their money among various asset classes in the stock market and feel adequately diversified.  Unfortunately, in today’s economic climate, all they really have done is purchase multiple funds all exposed to the same market risk that really does little to provide a cushion to the economic risks associated with investing in the market.

As a solution, many financial advisors take the traditional approach to reduce risk:  the old rule of thumb was to allocate your age to principal protected vehicles such as CD’s, Treasuries, EE Bonds, and Fixed Annuities.

By way of example, a 65 year old may put 65% of his retirement savings into one of the principle protected vehicles and the rest of their nest egg would be exposed to market fluctuations.

However, in a recent study from Putnam Institute, they put the old adage to test and they suggested that as you enter into retirement, no more than 5-25% of your assets be exposed to market risk if your goal is sustain your nest egg and the ability to make lifetime withdrawals.

Even Jim Cramer is quoted as saying:

“If you want to retire at sixty, I would put more than half of your retirement money in fixed income in your forties.  If you intend to work for years after sixty, I would put much less in those placeholders.  Your fifties begin the shift toward more fixed income.  And finally, in your sixties, unless, again, you keep working, fixed income should dominate.  Your opportunities to grow your money are now limited and the reward isn’t worth the risk.”

Source: Rick Bueter, The Great Wall Street Retirement Scam. May 2011.

Too often people make investments without clearly defining a goal for that investment.  The starting point is to understand the ultimate goal and then take the risk necessary to accomplish that goal.  Notice that it asks is the risk necessary.  That is different than what you may have experienced in the past where the question was “how much risk can you tolerate”.

As retirees near or enter into retirement, let caution take hold and review your diversification so that you don’t let a lifetime’s worth of savings be wiped out by a swift downturn in the market right before you need the money.

Michael Canet and his team at Prostatis Financial Advisors Group LLC have been providing comprehensive financial planning to their clients for more than 20 years. With a legal background in estate planning, a Masters Degree in taxation, and being a financial planner – Michael has the necessary skills to guide his clients into and through retirement by creating a simple-to-understand financial plan.

© 2016 Michael Canet, JD LLM. All rights reserved. This article may not be reproduced without express written consent from Michael Canet, JD LLM.


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  1. Gloria Daws says:

    I was informed by my personnel office that I will only be getting 60-65% of my pension for anywhere up to 6-9 months AFTER I retire. This is NOT what I planned on receiving upon my retirement!  I was also informed that I could not claim interest on my money the Government is keeping tied up during this period.  There is REALLY something wrong here! Why isn’t the Government letting retirees know UP FRONT what they are facing?  Nothing is being sent out by our Personnel Offices that you are going to get a severely reduced annuity upon your retirement.  How are people to plan for their retirements if they are not given this information until they put in for their retirements?  I was promised by the Federal Government a retirement pension upon completing my time in grade, completing the required number of years and age to retire.  I have met all the requirements to retire.  Why is Uncle Sam cheating me out of my full retirement and then refusing to pay me interest on holding on to my money for over ½ of a year! Why aren’t more Federal workers protesting this action?  Everyone who retires deserves their ENTIRE pension they earned.  This is the money I planned on living off of after retirement and I planned accordingly. Now I’m told I can’t receive my full pension that I earned.  Isn’t that what employees are supposed to expect when they retire?  Plan on retiring and making adjustments to their lives considering they will be living on a retirement pension.  Now the US Government is telling me I can’t receive my entire pension for at least 6 to 9 months AFTER I retire!  What other company, firm or business does not give their employees their FULL pensions when they retire?  This is an outrage!  I think all Federal workers should pull together and DEMAND the Government give us our due!  No more, no less.  I earned it!  All Federal workers not receiving their entire pensions should pull together and ask the President and our Congressmen, “Why do we have to wait for our entire pensions?!”  Receiving 60-65% of my pension is NOT what I planned on receiving!  I want ALL of it because I earned it and PLANNED on living on X amount of retirement dollars.  When you take into consideration the rising cost of living with food, gas, health insurance and utility prices going up and up; and now that I am retiring I am being forced into taking a cut in my retirement…this is ridiculous and I am mad as hell!  I didn’t work for over 33 years to have my pension almost cut in half to live on upon my retirement.  We ALL need to stand up and fight against this injustice!  Write the President, write your congressmen, write articles in your newspapers, contact ABC, CBS, NBC, CNN, FOX NEWS… everyone.  Let it be known that the US Government is letting their workers down by not giving us our full pensions. Put the pressure on to get our pensions in a timely manner!  If you owed the Federal Government $10.00 you can bet they would be on your front door step immediately to pay it back.  They don’t wait 6-9 months to ask for their money.  Why do we have to wait? We all need to stand up and DEMAND our full pensions!  This should be against the law.  To all the lawyers out there, how can the Government do this to a pension I rightly earned?  How can the Government hang on to my money and not give me the interest it earned while in their possession?

    Upset Retiree

    • guesttwo says:

      Your emotional distress comes through loud and clear and appears to be based on what your HR told you.  Here is what actually happened to me.  I retired at the end of June and received my first FERS annuity check on the first business day of August, as is supposed to happen.  The amount of the annuity worked out to be 90% of my agency’s final estimate.  At the time OPM approves/authorizes the interim payment, they send  you a CSA number.  You can then track your application on their website, which gives you the ability to provide the needed facts to your Congressman if you feel the delays are unreasonable.

    • Rsiwecki says:

      Remember guys that the reduced pension is done so that the Feds don’t have to come back to you later if they give you too much retirement in error. You will eventually get every dollar you are entitled to in a large makeup check.
      When I retired, I received 4 or 5 checks that were about 10 percent short. The 6 th check was about 1.4 times the normal.

  2. guest says:

    the single most immediate risk to the security of anyone’s retirement (current or planned) is the re-election of Obama in 2012

  3. FERSretired says:

    Since every CSRS and FERS employee are covered by a defined benefit plan pension (FERS also recieve SS) it would be impossible to outlive their income.  401k type assets (TSP etc) should be gravy which allows for a more risky asset allocation in the retirement years.  Now if the Gov’t payer of those pensions goes bust then we all have a much bigger problem than worrying about how our 401k assets are performing.  Entering retirement without debt should be a bigger priorty than asset allocation in a TSP type account.  Tax planning and minimization should also be a major priority before worrying about a paultry 2, 5, or 10% return on a defined contribution plan like 401k or TSP.