Retirement Risk Management

Explanation and Guide

When most people think about retirement risk management, they think about the concepts of time and value. That is, “At my current age, with monthly withdrawals from my retirement account of $______, and assuming I will live ______ more years, will I outlive my money?”

Some analyst (not LFM) like to quantify your financial market risk management level by using Modern Portfolio Theory (MPT). This technique is a statistical array of calculations that look at the market as a whole rather than individual investment opportunities. Investments are described statistically, in terms of their expected long-term rate of return and their expected short-term volatility. The volatility is then equated with “risk” which attempts to measure how much worse than average an investment’s bad years are likely to be. MPT’s goal is to identify the acceptable level of risk tolerance, and then find a portfolio with the maximum expected return for that level of risk as a methodology to enhance retirement risk management.

Analysts like this approach because it tends to be more "black and white". But we don’t live in a "black and white" world. We live in a world filled with emotion, concern, passion, happiness, and yes, fear. These nebulous parts that make us what we are, cannot be easily reduced down to a statistical quotient. You are more likely to get an accurate description of an individual’s retirement risk management level if you simply ask if they can sleep at night, and do they worry more often than not about their retirement assets.

If an investor is not able to sleep at night because of his or her investments, guess what, that investor is too heavily invested, for example, in stocks. You know it is funny (actually not really) that people think of stocks as risky and bonds as not risky. Many investors are about to learn a hard lesson from 20 years ago. The lesson: when interest rates go up, the value of your bonds (basically what you can sell them for) goes down. It is simply a mathematical truism.

For those who think it matters more, when it comes to retirement risk management, what kind of stock or stocks in which you invest, please remember Dr. Benjamin F. King’s findings (see LFM home page)…whether good stocks or troubled stocks, when the market rises, a very high percentage of all stocks go up. The opposite is also true when the market declines. Portfolios of retirement assets will also go up and down causing fluctuations in those intangibles that are a part of all of us…emotions, fears, etc. People will lose sleep and needlessly worry while the statistical analysts of the world argue that actually the risk level in retirees' accounts are proper and good. Well, it is not the analysts’ money. It doesn’t really matter “at the end of the day” what the analysts believe… it is what the account owners feel. If investors “feel” or are “uneasy” about their investment, then odds are very good that they are too heavily invested. LFM believes that there is a time to be more heavily invested and a time to be significantly out of the market. When it comes to retirement risk management, that is about as simple as it is.