The #1 Thing You Need to Know About Taking Risk in Retirement

Troy Sharpe: One of the most loaded questions you can be asked is, are you high risk, medium risk, or low risk? In fact, that’s one of the most surefire ways to know that you’re working with an accumulation phase advisor and not a retirement specialist.


Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of  The Retirement Income Show, and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®). I had a guy come in, and we sat down going through his personal information, helping to construct a retirement plan.  We had this conversation about risk. We started to tell him that the way we look at risk is different than a way a lot of firms look at risk.

He says, “Troy, don’t waste your time. I’m a medium-risk guy. 50/50, 60/40 portfolio.” He had about $1 million saved. I said, “Okay, well, if that $1 million, if it goes down in value  $100,000, tell me how you’d feel.” He said, “Troy, I’d fire you instantly.” Well, that $100,000 decline on a million-dollar portfolio is only a 10% loss. That’s absolutely not a medium-risk portfolio. If he had a portfolio structure that was 50/50, 60/40, he should expect to lose 25% to 35% in a recession. That would be $250,000 to $350,000, which is far beyond his capacity for losses.

Had a conversation with another gentleman. He comes in and he says, “Troy,  yes, I’m a medium risk person.” I said, “Okay, if the market goes down and you lose $100,000, tell me how you feel.” He says, “Oh, I’m completely fine. I went through ’08, I went through 01. If my portfolio drops $300,000, $400,000, I’m okay with that because I believe in investing for the long term.”

Two guys gave the same answer to the same question,  both medium risk with completely different risk capacities. Here’s what we need to understand when we’re talking about planning for retirement and risk, we are going to go through recessions. Typically, a recession is a 30% dry up from peak to trough. That will happen. The healthier you are, the longer your retirement, the more likely you’ll experience  multiple recessions throughout your retirement years.

This is why here at Oak Harvest, we use our Core4 framework. Pillar one is the piece of mind pillar where we put money that’s protected and secure and designed  to earn 4% to 6%. When we talk about risk with people, we have to figure out how much money should you have in the market based on your capacity for risk and also your willingness to take risk.

Here’s the question that you really should be thinking about when it comes to your retirement. Somebody who has a large capacity for risk means that  they’ve saved enough money to where the withdrawal they need to take from their portfolio is a very, very small percentage. If the market goes down 30%, 40%, 50%, their security and retirement is not jeopardized.

Let’s say you have $2 million save, and you only pulled $20,000 out because your Social Security is 50 between you and your spouse.  You only need to pull 20,000 from the portfolio. Well, if you have a $2 million account, that’s a 1% annual withdrawal. You could lose a decent amount in a market decline and not jeopardize your retirement security because you can still get that $20,000 no problem.

Now, somebody who has $800,000 saved, and they need to pull 40,000 out of the portfolio, that’s 5%. If the market goes down, let’s say it cuts in half, to get that same income, they’re going to have to pull 10% out of the portfolio, which then it’s a vicious cycle, and they’re going to run out of money.

What is your capacity for risk? Our Retirement Process process helps you to identify this by going through a series of steps that uncover what your  portfolio can withstand. A lot of times, for many of you, all you really need to make is 3%, 4% consistently, and you’ll have a pretty secure retirement.

Now, the second component of  risk is what we call risk willingness. I had a client a long time ago. She says, “Troy, I hear you talk about these dividend stocks and investing. I know your chief investment officer, Chris Paris.  I really respect his bio, and I want to put some money in the market with you guys. She had only been a client with the safe strategies that we use in pillar one of the Core4, but she had some money and she wanted to put it in the market.

I said, “We’ve had this conversation before, and I don’t think you have the willingness to take risk, but we’ll give it a go, and we’ll build a conservative portfolio for you.” First day,  the market’s down 1%. Her account goes down from $100,000. She only lost about $500. She calls me up the next day. She says, “Troy, I can’t stand it. Take my money  out, close my account. I do not like to see my accounts go down in value.”

She did not have a large willingness to take risk. Whether that account went up or down, it didn’t matter. It wasn’t going to affect her security, but it affected her emotional ability to see her account go down. When we have conversations with you about your risk and building a retirement  plan, we go through our Retirement Process process to help uncover what is your capacity for risk and what is your willingness for risk.

When you build a portfolio that’s constructed around the right capacity and your right willingness, okay, now you have something that you can withstand market falls. You can understand where your income’s going to come from, and you’re going to feel a lot better about your retirement.

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