What’s My Risk Tolerance | The Retirement Income Show | Risk Tolerance and Retirement Planning

 

Welcome back to the retirement income show and Mark Elliott here with well respected retirement wealth advisor and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) Troy Sharpe of Overharvest Financial Group, a local family owned firm. You can find out more on the website.

OK, OakHarvestFG.com great website, OakHarvestFG.com. If you have questions, concerns, boy, Troy goes into this a little deeper than I’ve ever thought of my retirement. I kind of like the sound of this. I’d like to chat with the team if they can help me give me a call. There’s no cost. 882 64 34. 882 64 34. The office of Old Car was located at 920 Memorial City, way right off Ettin and Bunker Hill. Most of us think of retirement really as our investment. That’s where we were a few segments ago talking about.

Most people think their retirement plan are their investments. That’s their retirement plan. During my granddad’s time, who retired in the 70s, he would have had a pension. He would have had Social Security. He would have had certainly high interest rates as well during the Carter days. Double digit interest rates, easy to put money in a CD to Slatter. It income was not a problem from my granddad. Now, inflation certainly was because inflation was double digits as well. For me, I don’t have a pension. I mean, I have Social Security. I’m Social Security eligible. Later this year at the age of 62.

Not quite there yet, but getting obviously very close. But that’s all I have, plus my little 401k and IRAs. So my thinking is that people like me that don’t really understand the financial world like you and you, the retirement expert that you are. Is that I think I probably have a lot of risk, but I know I need more growth. I played too much golf, Dreux, so I need to I need to catch up if I can. But I think most people with IRAs and 401. KS, we think of, boy, I’ve got to keep growing my money. I can’t put it in a CD like they could in the 70s because I can’t make anything there. So I’ve got to have all of my investment. Money has got to be in the investment world. That’s the only place to make money. So risk, is that a factor that you sit down and figure out? I’ve heard you know, well, I’m a moderate. I’m a you know, this risk, that risk or whatever. I

don’t know if that really tells me the story, but how do you look at risk? So risk risk for us is is. Really threefold. The first two parts, or at least the first one, is more conventional as far as how much risk are you willing to take with the fluctuation of your account values? Somebody who has a million dollars saved, and this is partly why that low risk, medium risk, high risk question is pretty bogus. If you’ve sat with a financial advisor before and and they ask you this question, it’s really a loaded question. And let’s say I’m medium risk and I have a million dollars. Well, if if I change that question around and now say, are you comfortable if your account goes down from one million to 800000 because a medium risk person should absolutely be comfortable with that. That’s only a 20 percent drop. That’s less than the normal dropped would see in the market in a typical recession. So one person and this has happened to me throughout my career, this is why we don’t ask this question anymore.

As far as are you medium risk, high risk or low risk? So the first part really is, OK, Will, if you have a million dollars in your account drops to 800000, what is your reaction? OK, and the gut answer is the best answer if someone sitting there thinking about it for a while. Typically, it’s not truly what they do because the instant reaction is the most it’s it’s the most emotional response. So we need to get an answer from that pretty quickly to really gauge where where people stand from an emotional willingness to take risk. And I would think the answer is different. You say almost five percent or 200000. That’s a different response. Absolutely. Yeah. Yeah, absolutely. Absolutely.

So that’s why I, I turn it on its head and rephrase the question. And that’s how our advisors do here in terms of dollars, because a lot of times people can’t compute percentages as quickly in their head as we can, or they just don’t care to do the calculation. They hear 20 percent, OK, 20 percent. But if I say two hundred thousand dollars, OK, now I have your attention. So that’s. But just to finish this thought out, one person may say, yes, Troy, I’m completely fine if my portfolio drops two hundred thousand. Another may say, you know, I have a long term view. Even if it went down 35 or 40 percent, I’m you know, I’m in it for the long haul. It’s fine. And someone else may say, no, Troy, I will fire you if you lose 200000 out of my million. Well, those three people have different emotional willingness to take risk. All three of those are not medium risk profile people, but they may all answer that question in that manner. So that’s the first component of risk.

The second component is what we call your capacity, your portfolio’s capacity to take risk. So capacity is a function of how much income you need to withdrawal relative to the overall size of your portfolio. So if you have a million dollars and you need to take out 50000 per year and you’re 60 years old, that’s a relatively low risk from a capacity standpoint. Capacity for risk standpoint, portfolio, because if you take that 50000 out and the portfolio drops 20, OK, you’ve now taken 25 percent out essentially in the first year of retirement, three.

One quarter of your entire life savings is gone the next year. Now, to get that same 50000 dollars with 25 percent gone, you’re left with 750 to get that same 50000 dollars. Now you have to take about a seven percent withdrawal because 50000 divided by 750 is somewhere around about seven percent. So as the portfolio drops in value, your income need represents a larger and larger percentage of the overall portfolio portfolio balance.

If the markets don’t turn around immediately and they fall another 10, 15, 20 percent, your portfolio declines in value. Now, to get that same income line, now you’re looking at nine, 10 percent of your portfolio being withdrawn. And if that’s the case, you will most likely run out of money in 10 to 15 years. It just you’ve you’ve depleted the portfolio to such an extent. It is no longer capable of sustaining withdrawals that allow you to maintain your standard of living and achieve the growth needed to regain its prior levels. So that’s the second component of risk, is what is your portfolio’s capacity for risk, meaning relative to to its balance? What is the percentage that needs to be withdrawn?

Ideally, at 60 years old, you want to be in that two to three percent range. Now to what you said, Mark, part of this and why we almost have to take more risk unless you get outside of the securities world. Part of the reason why so many people feel they need to take more risk is because the Federal Reserve, through monetary policy of printing money, essentially digitally invented it out of thin air, using that to buy bonds and then artificially lowering interest rates.

What they’ve done is they punish savers in this country, essentially, they’ve punished low risk investors. Your CDs, your high quality bonds, your money market accounts, your traditional interest bearing low risk, relatively safe choices aren’t going to grow enough to help keep up with inflation and help your money last as long as you do. So part of the reason why you feel that way, Mark, might be because, as you said, where are you supposed to put your money?

The only way to even with bonds, the only way to really get any interest with with bonds, you have to look at the junk bond markets or you have to go into what we call leveraged bond funds were essentially your money’s being put on margin, essentially is what happens with leveraged funds. So if you see a high quality bond fund out there paying you three and a half. Four percent. Dollars to donuts, they’re borrowing. Typically, hundreds of millions of dollars to go out and buy more bonds, to generate more income for the portfolio and then pass it on to you. Well, what happens to that leverage fund when things go bad?

Know, instead of losing five percent or 10 percent of your money, you’re likely to lose 15 or maybe 20 percent. So part of the reason is, of course, where we’re at with the the damage that the Federal Reserve has done to the interest rate environment in this country. And then the third part there, I said there were three parts of risk. And this is really the unseen risks that that most people don’t think about in retirement. Most people are solely focused on stock market risk. And, yes, that is an important one. But inflation risk, tax risk, longevity risk, so many other risks out there, sequence of returns risk your distribution rate risk putting money into CDs and bonds.

That is a risk because, again, you’re not going to earn enough growth to offset inflation and to have your portfolio have a chance to to grow so you do not live it. There are so many other risks other than stock market risks that are equal to as far as the long term consequence in the damages that can be done to your portfolio in your retirement, such as inflation and tax risks, et cetera, that are equal to stock market risk. One 800 022 sixty four. Thirty four. The good news is Retirement Process process addresses each and every one of these risks. And at the end of the process, you have a plan in place that helps you feel comfortable knowing that the big questions are being answered. You know, do you have enough? Can you retire? How long will your money last? Where should you take your income from? Should you take it from the IRA? Should you take it from the non IRA? Should you be doing Roth conversions? All of this is part of the Retirement Process process. It’s part of the income plan, the investment plan, the tax plan.

Then, of course, steps four and five. We look at the estate plan and we look at the health care plan. Those are two big components that are often neglected when it comes to a full retirement plan. So there are answers, there are solutions. There are ways to have less anxiety, to feel better about where you’re at, and you don’t need a million or two million or 10 million. We help people all the time, 700, 600, 500, 800 thousand dollars. It’s all about how much you spend. It’s all about the decisions you make, because every decision you make interacts with every other decision. Everything has consequences when it comes to the decisions you make in retirement because they’re all interrelated.

So give us a call. Leave a message. If you’re listening to the show and it’s not on a weekend or if you’re watching the show on YouTube, give us a call. Somebody may answer the phone. We’re simply going to talk to you about your situation. If nobody answers, leave a message and we’ll get back to you. One 800 832 164 30 for one 800 832. Sixty four. Thirty four. And by calling that number and leaving a message, what that means is you’re on the air. You’re on your way, taking the first steps to having that Retirement Process process planned out and a plan in place that that answers those big questions for you. And that’s why we kind of are doing a show that’s kind of, you know, are you retirement ready? And how in the world do I even figure that out? Well, most of us think about our retirement plan, really our investments.

That’s kind of the key, the 401. KS and the IRAs and the like. And if you got some real estate, great. And that’s all well and good, because you do need investments. You do need to create income for your retirement. But it’s so much deeper, which is why I really like how Troye handles all of these questions I throw at him because I don’t give him, you know, hard sliders on the outside corner. I’m not going to make it super hard for him. But he has got so much response to and passion for what he does for his clients at Oak Harvest that I really like. How he goes about this, informing you of how Congress works with their clients and the importance of, hey, being a nice person.

But here we’re here to help and you’ve got to be serious about retirement. So the Retirement Process process, income plan, investment strategies, tax efficient strategies, health care, long term care, legacy, estate planning, Social Security, big question, 90 percent of people get it wrong doesn’t mean you’re wrong at 62 or 70 just means you’re taking it wrong for your specific situation. And that’s according to the Social Security Administration. Then that’s in the income part. Right.

That’s that’s part of your income is Social Security. What about Medicare? We know health care is the you talk about inflation last year and 2020. Medical costs were up six percent. They were in the inflation rate and they gave it a six percent score. So we know what’s going higher than regular inflation. So what’s your plan for that? Well, Medicare is in the health care part. Those are all big, big things. And that’s the Retirement Process process. Great opportunity for you to call the team, you know, be proactive. Don’t be reactive. It’s 882 64 34, 882 64, 34. We’re headed to our final segment with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. Stay with us. We’re back right after this.