You’d be hard-pressed to find a word people hate hearing more than “risk” in the context of their financial plan, which is no surprise. We want our financial decisions to generate reliable, predictable results! However, as the saying goes, you can’t have your cake and eat it too. Even if you were to hide your savings in a mattress, you’d still be incurring risk. There could always be a flood, house fire, or some other catastrophic event, not to mention the lost earning potential and the decline of your dollar’s value due to inflation.
When it comes down to it, every choice you make with your money has a balance of potential risk and reward. The key to making wise financial decisions isn’t to avoid risk, but to let your risk tolerance and goals shape your choices. Here are the three questions to ask yourself when making decisions about your money.
How Much Risk Can I Tolerate, Especially In Retirement?
Risk tolerance is a term used to measure your financial ability and emotional willingness to accept uncertainty (risk) in exchange for greater potential growth (reward). For example, you may have diversified retirement income and a generous buffer in your retirement savings, but if the possibility of losing that buffer keeps you up at night, the risk may not be worth the potential reward. If you don’t want to sacrifice your goals, you may need to accept taking longer to reach them or find lower-risk options.
Once you’re retired, your risk tolerance is typically much lower than in your working years; it’s the season of life in which we all want the least risk! You’re already trying to manage a fixed income, plan for unknowns like healthcare expenses and longevity, and structure everything without triggering a sizeable tax event. In short, you’re doing everything you can to minimize risk and maximize security. But if you still have financial goals to meet, you’ll need to determine which goals are worth the risk, whether or not you have the financial flexibility to take on the risk, and how to balance your comfort level with your priorities.
What Really Matters To Me?
When it comes down to it, financial decisions aren’t really about where to put your money; they’re about what you want to do with your money. Most people have three goals for their retirement savings:
- Wealth Accumulation – “I want to make sure I don’t run out of savings during my lifetime, even if I live longer than 20 or 25 years after retiring.”
- Income Security – “I don’t want to have to sacrifice my lifestyle if the market drops while I’m retired.”
- Legacy – “I want to make sure my spouse will be okay after I pass, and I want to be able to leave an inheritance for my kids or grandkids.”
Depending on your values or personal situation, you may prioritize these goals differently. Once you know your risk tolerance, determining what’s at the top of your list will help you decide where to put your money, i.e. which tools are best suited to your goals, financial situation, and comfort level.
Which Tools Will Match My Risk Tolerance and Goals?
Let’s say you need to cut down a tree; would you use a wood chisel or a chainsaw? A chisel isn’t a bad tool, it’s just the wrong tool, If you were carving an intricately detailed piece, it would be perfect. Managing your money is no different, and choosing the right tool for the job is essential.
Traditional Retirement Savings Vehicles
If your goal is wealth accumulation beyond retirement, traditional or Roth IRAs, 401(k)s, and brokerage accounts tend to offer the greatest growth potential. Keep in mind that in the world of investing, higher potential rewards mean higher potential risks. You may be able to reduce those risks by opting for a more conservative balance of stocks and bonds, but your savings will still be affected by market fluctuations, for better or for worse. It’s also worth keeping in mind that a traditional IRA and 401(k) will both set you up for Required Minimum Distributions, which will contribute to your taxable income in retirement.
Modern Annuities®
If you want to prioritize income security, Fixed Indexed Annuities (FIAs) fit the bill perfectly. Let’s say you use a portion of your IRA to purchase an IRA annuity structured as an FIA. These offer monthly income that’s guaranteed for life, offering predictable cash flow that mimics a monthly paycheck. This makes it much easier to manage your bills in retirement (which are usually monthly) and budget appropriately. On top of that, the principal is guaranteed to your beneficiaries! The downside is that they can be costly, and early surrender will incur a fee. However, if income security in retirement is high on your list of priorities, we can’t recommend them enough.
Modern Life Insurance™
One of the best things you can do for your loved ones is think about how to reduce taxes and maximize what you leave to them. For example, without proper planning, leaving your IRA to your spouse can cause their taxes to double. And how much of your estate could be whittled away if you don’t have Long Term Care Insurance and need to spend 5 years in an assisted living facility? With Modern Life Insurance™, you can structure a policy that gives you access to 95% of the death benefit for Long Term Care needs and provides a tax-free lump sum to your beneficiaries. This lump sum can be used as an inheritance itself, or be used to pay taxes incurred by other portions of your estate, effectively canceling them out. Like annuities, these policies can be costly, especially the longer you wait to purchase them, but it’s worth asking yourself if the benefits to you and your loved ones outweigh the cost of premiums.
Taking the Right Risks
As you decide which financial risks are worth it in the context of your goals, it’s important to remember that it isn’t an all-or-nothing scenario. Creating the right mixture of strategies and products can allow you to meet all of your goals at varying speeds. It just depends on which goal is most important to you, and what you’re willing to do to get there. At Parady Financial Group, we have a saying: Your Life, Your Way℠! You deserve to work with a trusted financial team that listens to you and creates custom solutions for your needs. We’re ready to help you find a strategy that you can feel good about while accomplishing what matters to you. Start here to learn more.
