CHAPTER 5: Risk

CHAPTER 5 Risk

Up to this point we have gone over two types of financial products that can be risky:

Mutual funds have market risk and bond funds have interest rate risk. Variable Annuities have risk if they contain mutual funds and bond funds, though they do have an option for putting some of your assets in a fixed allocation.

Fixed and Fixed-Indexed annuities have less risk. Though all annuities; fixed, fixed-indexed, and variable, carry underlying risk associated with the credit-worthiness of the company.

I personally have no problem with risk inside investments. I don’t have a problem with people skydiving either, though I think people who skydive are usually pretty aware that they are about to jump out of a plane. I don’t always think that’s the case with participants who own market-based retirement accounts, whether they are Mutual Fund Accounts or Variable Annuities.

You should be highly aware of the risk inherent in your assets, whatever that is. You can make a lot of money in a market-based product, and you can also lose a lot of money in a market-based product. You should be aware not only of how much risk you are “comfortable taking” which is the standard way of assessing risk, but also how much risk you can “afford” to take, and most importantly, you should have an awareness of what you need

this money to do for you in retirement. Do you need it to create income? Do you want it to be a “rainy day fund”? Do you want to leave it to the kids?

Your awareness of what you want the money to DO should influence your decision/preference on risk. As people get older and closer to using their money, most look for ways to minimize their downside risk. If you bought a product 20 years ago and that product is still set to an extremely aggressive allocation, but you are a year from retirement, you could wake up one day wondering where your parachute is.

Reach out to us for a risk assessment of your current retirement plan.