Economic roller coaster turns boomers’ stomachs

The Bakersfield Californian
August 5, 2011

It’s stomach-turning. No, I am not talking about how you feel after you get off the Green Lantern: First Flight, the just-opened new thriller roller coaster at Magic Mountain. I am talking about how you feel after watching the congressional debt-ceiling debate, after watching the stock market take your investments on a roller coaster ride, and after you now realize that you have no idea what it all means for the future of the nation’s economy and your investments, in particular.

I could say I know what it all means. But I would be lying. The truth of the matter is that there are many uncertainties in the economy now. How they will affect our incomes, our investments and our abilities to retire is anyone’s guess.

That does not mean we have to sit idly by and just let the consequences “happen” to us and our individual futures. Investments can be redirected, personal savings can be imposed and decisions can be made.

But first, we must determine our “risk tolerance.” No one can tell us what our risk tolerance should be. It’s a personal decision based on many personal considerations. However, once we determine our risk tolerance, we can allow that to help shape our investment and retirement decisions. If you take the risks you can tolerate, you often feel more in control and you will have the ability to make better investment and life decisions.

Recently two boomers, Jane and Sam, met with me to help them plan their retirement, which was less than a year away. While they were in agreement as to when they would retire, as investors, they were like night and day. Jane was very aggressive, wanting to take risks and grow her money. Sam is a slow-and-steady-wins-the-race kind of guy.

Sam’s 401(k) allocations showed that he wasn’t about to gamble, even the slightest, with his money.

During our meeting, Jane kept pointing out how her investments continually outperform his and pushed him to take more risk. Sam just wasn’t comfortable with that, but was willing to oblige Jane to keep the peace.

Being a financial planner is more than just creating spreadsheets to show clients what their income will be when they retire, and helping clients invest and manage their money. Meeting with Jane and Sam cast me in the role of a mediator.

I explained to Jane that Sam is a conservative guy, something she already knew from their many years of marriage. Sam wants peace of mind knowing his money will still be there, even if the stock market goes down. If he lost money due to her insistence, it would just end up causing unnecessary tension in their marriage. She agreed.

As for Sam, I asked him if he would be willing to be a little more risky with some of his money. He agreed, based on the retirement plan I put together for the couple. Sam saw an opportunity to be a little more moderate with some of his money, because he could see that he would not need it until 15 years into retirement.

The couple left smiling and holding hands, knowing they learned a little more about each other and they both compromised. The plan was not as aggressive as Jane wanted, but satisfied Sam’s conservative tendency. The bottom line: The plan still allowed them to retire and meet their income needs next year.

Certainly the cornerstone of a successful retirement is having a “good plan.” If the plan involves a couple, it must be built on a solid foundation of agreement. And that includes agreement on “risk tolerance.” Generally, there are five investment risk categories: conservative; moderately conservative; moderate; moderately aggressive; and aggressive.

Here are some questions that can help determine your risk tolerance:

  • How old are you? The younger you are, the more ability you have to recover from a financial loss. A 30-year-old, whose stock portfolio circles the drain, or who is upside down on a mortgage, has three or four decades to recover before retiring. A boomer in his 50s has much less recovery time and “tolerance” for such losses.
  • Are you a risk-taker? Is it your habit to drive over the speed limit, or do you poke along on the freeway? Are your vacations spontaneous, or planned in detail? Personality and lifestyles can provide clues as to risk tolerance.
  • How do you make decisions? Do emotions drive many of your decisions, or do you plot the pros and cons of many decisions, such as buying a car, changing jobs, etc.?
  • How do you react in a crisis? When things don’t go your way, do you take it in stride, or do you fret, or get angry?
  • How will you use your money? Will the money you plan to invest be needed to support you immediately upon retirement, or will it be a cushion for future needs?

There are several free, online programs that will compute your risk tolerance. All of these programs must be considered “just tools.” Only you know what you can tolerate.

One of my favorite online programs is one developed by Kiplinger and can be found at www.kiplinger.com/tools/riskfind.html. Investors respond to financial scenarios or personality trait questions. Then they hit the “estimate” button and are told how much of their long-term retirement money should be invested in stocks.

These online programs often are specialized, helping assess risk tolerance for investing in stocks, real estate, early retirement, etc. If you understand your tolerance for risk, an attorney, accountant or financial advisor can help you craft your retirement plan.