Managing Investment Risk in Retirement Planning

The Critical Role of Risk Management in Your Retirement

When was the last time you updated your investments inside your IRA or 401k? If it’s been 5 or 10 years or more, then you’re likely at a lot more risk than you think, especially in this volatile market.

Are you confident about the level of risk in your retirement portfolio? With market volatility, inflation concerns, and rising interest rates, understanding and managing your investment risk has never been more critical.

Many Americans approaching retirement are taking on far more risk than they realize – or than they need at this stage of life. This could put your hard-earned savings in jeopardy just when you need them most.

What Is Investment Risk in Retirement?

Investment risk in retirement simply means the chance of losing your money. When you’re working, you have time to recover from losses. In retirement, you don’t.

High-risk investments might grow more but are also more likely lose more. Low-risk investments are safer but grow more slowly. Finding the right balance is crucial for your retirement security.

Time frame becomes even more relevant as you get closer to retirement because you have less time to make up the difference if the value of your portfolio of investments decreases. You need to account for that risk and update your portfolios every 6 months or so to ensure you’re not exposing yourself to unnecessary financial danger.

Ryan Thacker, co-founder of B.O.S.S. Retirement Solutions, explains it this way: “We have the opportunity to visit with thousands of families every year. And when we have that first initial meeting, 99% of the people are taking far more investment risk than they know, or that they need to at this stage of the game.”

Understanding Your Risk Score

One powerful tool for managing retirement risk is understanding your risk score. This is essentially a measurement from 0 to 100 that indicates how much risk you’re taking with your investments.

To give you perspective, different investments carry very different risk levels:

• Venture capital investments: Risk score of 100 (highest risk)
• Penny stocks: Risk score near 100 (extremely high risk)
• Stock market investments: Typically between 5 and 75
• Annuities from established companies: Risk score around 1 (lowest risk)
• U.S. treasury investments, money markets, CDs, etc. Risk score of 1

With the B.O.S.S. Retirement Blueprint™, you can get a clear picture of your current risk score. Think of it like a speed limit sign for your investments. If your risk score is 85, it’s like driving 85 miles per hour on the freeway – if there’s an accident (market downturn), the damage will be severe.

Learning from Investment Mistakes

One question worth asking yourself: “If you could unwind the top three financial mistakes you’ve made in your life, how much more money would you have today?”

The founders of B.O.S.S. Retirement Solutions have learned from their own investment mistakes and use those experiences to help their clients avoid similar pitfalls. They’ve seen how easily high-risk investments can turn sour, even when they seem promising.

For example, they once invested $50,000 in what seemed like a promising venture involving electric vehicle charging stations. Despite White House endorsements and involvement from well-known investors, this investment eventually went to zero, wiping out all equity investors.

From this experience, they derived important principles for managing high-risk investments:

1. Don’t put more than 1% of your portfolio into high-risk ventures
2. Don’t be swayed by endorsements or other investors
3. Don’t give in to greed by putting an outsized portion of your portfolio at risk
4. Be skeptical of politically endorsed investments

When “Safe” Investments Go Wrong

Even investments that check all the right boxes can sometimes go wrong. The B.O.S.S. Retirement team once invested in an ATM fund that seemed to offer reliable monthly income with tax benefits.

They did their due diligence, verified the operator was well-established (one of the top five largest in the United States), and ensured there was proper auditing of financials. Yet eventually, the payments stopped coming, putting their investment at risk.

This underscores the importance of working with professionals who can spot the warning signs in the economy. As Tyson Thacker notes, “We’re starting to see cracks in the foundation here in September of 2024 that maybe a lot of people don’t see yet… we usually see from a business perspective these cracks in the foundation faster than a lot of folks do who don’t do this for a living.”

The Five Buckets of the B.O.S.S. Retirement Blueprint™

The B.O.S.S. Retirement Blueprint™ offers a comprehensive approach to planning that addresses risk through five essential buckets:

1. Cash Bucket: Liquid funds for emergencies
2. Income Bucket: Sources of reliable income when your paycheck stops
3. Growth Bucket: The risk bucket for appropriate growth opportunities
4. Tax Bucket: Strategies to minimize your tax burden
5. Legacy Bucket: Planning for what you leave behind

This blueprint ensures you have a balanced approach to retirement planning rather than putting too much emphasis on any single investment or product.

Three Key Principles for Managing Retirement Risk

1. Learn from Past Mistakes

Working with advisors who have experience with both successes and failures means you benefit from their wisdom without having to make the same costly mistakes yourself.

As Ryan Thacker explains, “Our past mistakes make us better advisers because we understand what the risks look like and we can guide you through that so that you don’t have to make the same mistake.”

2. Diversify Properly with a Plan

Having a comprehensive plan is far more important than any individual investment product. The B.O.S.S. Retirement Blueprint™ (which stands for Build the Optimal System of Security) emphasizes reliable income streams.

For optimal security, aim to have at least three different income streams in retirement:

• Income for today’s needs
• Income that grows with inflation
• Income for rising medical costs

3. Make Your Investments Boring So Your Retirement Can Be Exciting

You don’t want to be tied to the daily fluctuations of the stock market during your retirement years. One B.O.S.S. Retirement Solutions client shared how liberating it was to stop checking the stock market first thing every morning after implementing his retirement blueprint.

“This is the first time that I recall not having to worry about waking up and the very first thing that I do is open up my computer and look to see how the stock market’s doing,” the client said. “I don’t really care anymore how the stock market’s doing because I know I’ve got a plan in place.”

The Most Common Investment Risk Mistakes

Many investors make fundamental mistakes when managing their retirement risk:

1.     Setting and forgetting their portfolio:

Your investment allocation needs regular updates and rebalancing, especially as you approach retirement.

2.     Following outdated rules of thumb:

Strategies like the traditional 60-40 stock-bond mix or the “100 minus your age” rule for stock allocation were invented long ago. Today’s economic landscape requires a more sophisticated, individualized approach.

3.     Oversimplifying asset allocation:

A properly diversified portfolio is much more than just a simple mix of stocks, bonds, and mutual funds. Your portfolio should be uniquely tailored to your specific situation.

4.     Swinging for the fences in the last years before retirement:

Many investors try to make up for lost time by taking on additional risks right before retirement – precisely when they should be reducing risk.

One of Warren Buffett’s most insightful quotes applies perfectly here: “It’s insane to risk what you have in order to obtain what you don’t need.”

How to Assess Your Current Risk Level

If you’re wondering how much risk you’re currently taking in your portfolio, B.O.S.S. Retirement Solutions offers a free Retirement Risk Report. This comprehensive analysis examines your stocks, bonds, mutual funds, and other investments to give you a clear risk score.

This analysis often proves eye-opening for clients who discover they’re taking on much more risk than they realized. The good news is, once you’re aware of your risk level, you can adjust it to better align with your retirement timeline and comfort level.

The Importance of Professional Guidance

Managing investment risk isn’t something you should handle alone. Working with experienced financial advisors who understand the nuances of retirement planning can help you navigate this complex landscape with confidence.

As Tyson Thacker puts it, “This is not a do-it-yourself project.” Professional advisors can help you identify those early warning signs of economic trouble and adjust your strategy accordingly.

Creating a Risk-Appropriate Retirement Strategy

Retiring successfully today doesn’t happen by accident. It starts with a plan – a plan that properly balances risk against your need for growth and income.

The B.O.S.S. Retirement Blueprint™ can help you create a comprehensive strategy that addresses all aspects of your financial future, including the critical component of risk management.

By understanding and properly managing investment risk, you can protect your hard-earned savings from market volatility while still positioning yourself for the comfortable retirement you deserve.

Remember, as you approach retirement, your investments should become more boring so that your retirement itself can be more exciting. Don’t let unnecessary risk keep you up at night when you should be enjoying the fruits of your labor.

Are you ready to understand and manage the risk in your retirement portfolio?

B.O.S.S. Retirement Solutions can help you create a customized retirement game plan. Call 800-637-1031 to schedule your free Retirement Blueprint™ analysis, or click here to request your analysis online. The peace of mind that comes with knowing you’re taking the right amount of risk is invaluable.