- Market risk
- Interest rate risk
- Sequence of returns risk
- Inflation
- Taxes
What things are you doing now to help mitigate these risks?
Let’s dive into them.
Market risk
This involves the risk that comes with investing. The market is volatile. If you look at the stock market with a bird’s eye view since inception, from then to now the market has gone up. The S&P 500 was valued at 44.06 on March 4th 1957 and was valued at 5460.48 at the end of June 2024. However, if we look at the S&P 500 on an annual basis, you see a lot of ups and downs. We see both positive years and negative years. With investing there is risk, but with risk there is opportunity for reward and opportunity for loss. How are you positioning your investment accounts to maximize growth and minimize your risk? We cannot control which way the market goes, nor can we eliminate market risk completely, however we can be positioned appropriately to plan for any type of market to help maximize returns and minimize risk.
Interest rate risk
As interest rates rise, bond prices fall. As interest rates fall, bond prices rise. Bonds are often seen as a conservative investment, however as we saw in 2022 bonds (using AGG returns) were down roughly 13% along with equities (using SPY returns) being down roughly 18%. That left many investors scratching their heads. There are ways for you to manage interest rate risk. Is your portfolio positioned appropriately?
Sequence of returns risk
Often the plan once you enter retirement is to turn a spicket on from your portfolio to provide you income throughout retirement. Well, what happens if you walk into retirement and the market is down 11% year 1 and 11% year 2? Your portfolio is down 22% not factoring in the % in withdrawals needed for income. If you need a 4% withdrawal each year for income, your portfolio is really down 30%. How much of a return do you need to get back to even….. a 43% return. If you have $1M entering retirement, at the start of year 3 you now have $700,000. This risk is one reason why some people have had to go back to work once they retired. Another reason why retirees worry about running out of money. Remember we do not know if you are going to walk into retirement and the market do well or if you are going to walk into down years. If you are within 10 years of retirement, what planning are you doing to help mitigate this risk?
Inflation
Historically inflation has been around 3%. Recently it has been much more than that. Oftentimes pre-retirees and retirees accumulate large amounts of cash in checking and savings. Well, that causes their assets to be eaten away by inflation. Let’s say you have $100,000 set aside in a checking account and 3% is inflation rate. In 2 years your $100,000 would be worth roughly $94,000. Your dollar tomorrow is not worth the same as it is today.
Taxes
Taxes are not only one of the biggest expenses during your working years, but they are often one of the biggest expenses you face during retirement. Do you want to be in a partnership with the government for your entire life always having a large portion of you income go to Uncle Sam? What are you doing today to minimize your lifetime tax bill, not just your taxes for the current year? Tax planning is more importantly a long-term play not just a short-term play because the goal is to reduce your lifetime tax bill.
How are you planning today to help mitigate these 5 risks? If you fail to plan today, you plan to fail later.
Sources:
S&P 500 Historical Prices - Multpl
AGG Performance History & Total Returns (financecharts.com)
Disclosure:
Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.