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The prospect of retirement can feel both exciting and daunting, all at the same time. Not only do you have to start living off your savings, but you also need to make sure you don’t run out of money.

So, how do you build a retirement portfolio that serves both purposes? And what are the risks you can prepare for?

In this episode, you’ll discover why Portfolio Risk is one of the most important considerations for pre-retirees.

Listen now to build a portfolio that puts you in a stronger financial position.

Show Highlights Include:

  • Why do retirees and pre-retirees need to think about Portfolio Risk (and how diversifying your Portfolio saves you from unforeseen events) (2:10)
  • Four questions to consider to make sure your portfolio is properly positioned to help mitigate the bad years as best you can (6:58)
  • How keeping a certain amount of your income in “short-term instruments” protects you from unforeseen market volatility (8:20)
  • Why the good-old “money under the mattress” way of storing your income is the worst idea (and a more reliable practice) (9:01)
  • The FLOOR method to adjust how much Portfolio Risk you could take (9:59)

Thinking about what your typical week in retirement will look like? Download our Ideal Week in Retirement planner.

Read Full Transcript

Want to finally stop working and retire in peace. It's about more than quitting work and living off your savings in retirement reimagined. You'll discover how to have a fulfilled retirement that lets you enjoy travel, family time and freedom. And now here are your hosts, Ron Bernstein and Nicole Sullivan.

(00:24): Hi and welcome to the retirement reimagined podcast. My name is Nicole Sullivan. I'm a financial planner and the co-founder and director of financial planning at prism planning partners. Today I'm joined by my partner and the managing member of our firm, Ron Bernstein. Hi Ron. Hi Nicole. How are you today? I'm doing great. How about you? Fantastic. Really excited about this other really pertinent topic that we're gonna be discussing today. Very timely.

(00:53): Yes, it is great timing. I think a lot of people forgot about risk. They seem to think for the past 10 years that markets always go up and that is definitely not the case. And you view risk from a wider lens. And I know we're gonna talk specifically about risk in relation to your money, but every day we step out of bed and out the door. I mean, we incur risks. You're getting into a car, but never really even give any thought to it. And it's not something that is routinely, unless you're, you're talking about insurance, you know, risk really doesn't come up much in life except in our world when it comes to markets.

(01:33): Right. And I think when you talk about other risks and protecting your household against that, we should probably in the future do a conversation just around risks that households may incur that are not related to the markets, things like insurance, protecting your home and valuable assets, things like that too. So that's a good idea for the future. Actually it is because sometimes we lose sight of that aspect of it because it's a measurable risk and when risks are typically measurable, they can be offloaded. And that's really where we have various insurance out there to take care of that. Unfortunately though, that doesn't really exist when it comes to one's portfolio, but it is something that we can kind of diversify against to some degree. So let's jump in and kind of get into today's conversation. Ron, my first question for you today is why do retirees and pre-retirees need to think about portfolio risk?

(02:34): Well, 2022 has been a great lesson for people in terms of why we need to reconsider investment risks. And let's just look back a few years ago in 2008 during the great recession, when a lot of people just got burned portfolios and real extreme cases might have been down 60 or 70%. It's understandable that a lot of folks get scared. And in some cases like that, when it happens, the fight or flight type of mindset means that a lot of folks just bailed and said, you know what I'm gonna sell. And when they did, it was typically on the lows of that particular market move. And when that happens, you just never put yourself in a position to fully recover from a situation like that. And I think memories sometimes can run for a little while and it was maybe several years later then once we were in recovery mode with the market that the confidence level on a lot of people's parts was just it's ready to get back into the market. That's what they did. And it was a great run here. I think what's happened over the last six or seven years is complacency starts to settle in it's all well and good when the markets are going up in a very favorable, low interest rate environment in particular, which is good for stocks, but it's not that appealing for folks to get into fixed income like positions, unfortunately, because you just couldn't get any yield.

(03:51): You know, it's so interesting when you bring up about how short people's memories are. I remember I started my career in financial services in 2012 and there was so much worry still with the clients that we were meeting with 2008 was still very fresh. People were not confident about kind of going all in on stocks at that time. And it's just very, very interesting how even some of the clients that we worked with back 10 years ago were much more risk averse then. And then in 20 16, 20 18, they, they got a lot more comfortable with being all in. And maybe that was good. Maybe that wasn't good. But I think to your point, Ron, you know, memories are fleeting and I think it's just so important to have a plan and to have an advisor to help kind of bounce ideas off of. And it's been interesting too, in this low interest rate environment that we've been in for the past couple decades here. Um, but really in the past five or six years, the acronym Tina came about. And if you haven't heard that or don't know what that means, Tina stands for. There is no alternative to stocks, especially the us qui domestic equities, which have just been so dominant.

(05:09): Yeah. And I think what happens is, is that complacency yields some folks to forget the basics. And the fact is, and obviously this is the topic for today is stocks are inherently risky and there's other concepts that get forgotten as well. When you look at the sector space, because there was a myriad of, of well known companies out there, especially in the growth space that have dominated the last decade. And, and the fact is is that you can really get caught up in the momentum of some of these sectors, but things like diverse diversifying your portfolio. It's all about having an appropriate miss mix of risky and less risky assets. And you need to be disciplined in those situations.

(05:50): You know, inflation was something that people forgot about as well for a number of years. And as inflation came back, the fed has had Tori raise interest rates and that's impacted all kinds of markets, including the bond market. It's been kind of a perfect storm this year where both stocks and bonds have gone down, bonds are considered less risky than stocks, but I think it's been just such a challenging year for investors kind of regardless of risk tolerance quite in irregular one .

(06:17): And I think we need to be careful here not to get too cut up in the policy modes that may have altered the interest rate landscape here and may have perpetuated this inflationary trend because these things can happen and they're bound to happen. It's during certain times in the markets, we reach a level of multipliers that cause a lot of bubbles to occur. So it's just a matter of not when, but or not if, but when these situations come about, you know, for folks who have a multi decorated retirement, it's important for retirees to maintain that longer term perspective. And just because there's a bad year or two in the mix, it shouldn't cause panic just know that returns are not veneer,

(06:58): Right? They're not, I wish they were, it would make our lives a lot easier. yes. So Ron, we know that avoiding risk altogether is unlikely for investors. So how do retirees make sure that their portfolios are properly positioned to help mitigate the bad years as best they can? I think the important or most important part is just to keep in mind the research and methodology behind how a portfolio is constructed. Why did you choose whatever stocks or funds that are in your portfolio that you elected to invest in? Uh, what was the strategy around it? How frequently are you evaluating them? Are you instituting a rebalancing strategy, but ideally you have a money manager who's helping oversee these investments. And these are the things that I'm sure were explained to you at some point, and you may have forgotten 'em. So just a simple request to review your investment methodology and strategy is a great thing to talk about.

(07:55): Positioning yourself appropriately for portfolio withdrawals is a special, is especially important. A financial plan often dictates how much risk is required to fund a retirement. So getting a plan completed is a great way to have guidance for what to do when the markets are down, right? You wanna avoid quote unquote, kicking your portfolio when it's down and what safeguards do you have in place to help mitigate that?

(08:20): And you, you know, and we've been championing this, this topic for a while about the, the importance of having a financial plan, because it really helps you on a myriad of different matters, but important one too, is, is handling cash management during a retirement cycle. So we'd like to re recommend also keeping a certain amount of cash in short term instruments. And those are typically less volatile for retirees. And it's not for us to share the percentages because it really is, depending on everyone's unique situation, but making sure your liquid also helps weather these types of swings in market cycles. So it's important. However, you don't ever wanna have too much liquidity because then you miss out on some of the long term gains. So it is a delicate balance, Right? And obviously the effects of inflation eroding away at the purchasing power of your cash too.

(09:07): Yes. That's a big one because that is what we're fighting against. Yeah. Yeah. We typically don't recommend cash in the mattress as I like to call it. No, no, No, no. Um, you're losing money when you do that, for sure. Just because your dollar just doesn't extend all that much as time goes On. Ron, any final thoughts on risk investing or risk mitigation tips? I guess bottom line is everyone's situation is unique. And when you hear friends out there bragging about X or Y stock, you don't know what their situation is, meaning their net worth their risk profile or how much income they need or anticipate in retirement. So don't think your portfolio portfolio should be doing better or worse because retirement income source is like annuity payments, pension income streams also need to be considered when trying to figure out how much portfolio risk you can take on. And that can never be viewed in a vacuum.

(10:00): Absolutely. Those are some great points. We call those retirement income streams, a quote unquote floor. And for some people who have maybe modest lifestyles and robust floors and income streams that cover what they need, they might be able to afford to take more portfolio risk or alternatively, some of those folks may not like risk and it may keep them up at night. So they might be able to afford to take less risk and not have to rely on their assets so much. It's so nuanced. And so individualized that I think it's really troubling to kind of rely on your friends' advice when it comes to these matters.

(10:43): And it's also important to get an early start in having conversations around this because it is something that is, is acquired in time and clearly, uh, having good coaching around the fact that you're working with advisors could certainly better position you to, like I said, during these really difficult unsettling times to be very much grounded and, and looking beyond, you know, what is happening here in the short term, because I know for us and when we do plans, you know, we, we tend to look in terms of years, not months here. And it's, it certainly diffuses a lot of the risk when you're talking about 10, 15, 20, or time horizons. So it shouldn't be of concern when, when we have markets like we're experiencing now.

(11:31): So I'd be remiss if I didn't bring this up, but when we're having a conversation about risk, it brings up the whole meme stock game stop saga of early 20, 21. And Ron, I see there, you there with a big smirk on your face, we saw so many of our clients' kids or just kind of people we knew through the grapevine trying to play the, the market, thankfully in very small positions, but trying to take advantage of some of these risky trades, you know, going on and capturing some of the volatility in the marketplace in 2020 and early 2021. And I really hope that some of these younger kids learned a lesson, because if you're in some of these esoteric sectors and thinking that's going to be a major part of your portfolio, it really isn't. And having what I call a quote unquote base of boring and saving consistently is what's really going to help determine long term portfolio success and an appropriate asset allocation as

(12:37): Well in terms of even some. And let's not just blame it all on, on the younger generation. There's a lot of folks, even my age, who, you know, we're trying to recover from their own inadequacies in terms of saving enough for retirement and thought they could make it all happen in one or two quick trades that unfortunately doesn't have usually have a, a favorable ending and low and behold we're going through that correction right now, because at the end of the day, and this is another great lesson in investing is fundamentals will always win out. It's just a matter of when that occurs. And this is just one of those periods where lessons are gonna be learned. And hopefully in this case, it gets embedded in the minds with folks and starts breeding better habits down the road, Right? We were, I think, towing the line between investing and gambling for a while there with certain people's risky behavior, All good stuff.

(13:28): All good stuff. Thank you, Ron. This was wonderful. Thank you, Nicole. And, uh, look forward to seeing everyone again on, on our next podcast. Absolutely. So before we sign off, I just wanted to remind everyone that if you enjoyed today's episode, please follow us and subscribe. We release new episodes every Thursday of the retirement reimagined podcast. I'd also love to direct you to our website, which is prism planning, partners.com. We have a myriad of retirement related content, uh, blogs, videos, the whole gambit. So please check us out. And if you have any questions, I'll make sure to put Ron and my contact information below in the show notes. Thank you all again, wishing you all the best and stay happy. Stay healthy. Thank you. Take care. Bye-bye bye bye.

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