If you search the Internet you’ll find that there are millions of blog articles about risk, and managing risk, when it comes to investing. Unfortunately, many of those articles don’t do a very good job of explaining exactly what they mean when they talk about risk.
If you’re going to be retiring soon, and you’re in the planning stages right now, there are a number of risks that you need to know about so that, if and when you face them, you’ll know what decisions to make. That’s exactly what this blog will try and help you do today. Enjoy.
Risk #1: The Risk that every type of Investment brings
When you talk to most investors you’ll find that they think of risk as the amount of up-and-down fluctuation that an investment has based on its original price and then on the returns received. In order to quantify that risk in, for example, an ETF, mutual fund or portfolio, most investors use what’s referred to as a “standard deviation”, which calculates the long-term annual return, on average, that an investment will have based on how it typically fluctuates.
The standard deviation can actually be found on the Ratings & Risk tab on the Morningstar page of any fund or ETF. That being said, it’s actually quite difficult to use that standard deviation if you want to calculate the risk for an entire portfolio.
Risk #2: The risk of having a Shortfall
In business, a shortfall is when a company doesn’t have enough money to continue operations. They fall short of their operating budget and, as you can imagine, this causes all sorts of problems. When planning for retirement, avoiding a shortfall is definitely important because, frankly, you don’t want to run out of money if you’re still going to be alive for 5, 10 or 15 years. Indeed, falling short of money for just 1 year would not be a lot of fun.
You can access a retirement income calculator online to assess the risk of shortfall that you have by putting in information like your age, how much you have in savings, investments and other financial information. If retirement is only a few years away, that’s a good idea as it will show you how far off course your retirement planning might be (or, if you’re lucky, how well you’re doing).
Risk #3: The risk that your Emotions will cause you to make a bad decision
This is one risk that’s definitely worth noting, the risk that your emotions will cause you to make a bad decision about your retirement finances. The fact is, as many consumers get closer to retirement, they begin to invest their money more aggressively and thus take on more risk than they normally would, especially if the market has been on a “big run”.
Many investors, young and more mature, feel giddy after a bull market, something that leads them to have a false sense of security and, unfortunately, underestimate the actual risk that they’re taking with their money. Once that bull market comes to a crashing end however, it becomes painfully clear that their emotions got the better of them.
These are the biggest 3 risks that you facing retirement, although there are others including inflation that shouldn’t be forgotten. That being said, the 3 risks above are the worst end, if you keep focused and avoid them, your chances of retiring in the lifestyle that you desire will be much better.