On Retirement Planning Risks

How Much Risk?

By Rick Kahler CFP®

If I asked you how much risk you are taking with the investments in your retirement plan, what would you say? My guess is nine out of ten people couldn’t answer that question in a meaningful way. Answers like “A lot,” “Just right,” or “not much,” may as well be “I have no clue.”

Risk tolerance

We typically think of risk levels in terms of “risk tolerance.” This is the appropriate portfolio risk that a person would be most comfortable taking with their investments. While investment advisors are required to assess your risk tolerance and you can measure it yourself on various internet sites, determining what risk you are comfortable with is more of an art than a science. It depends on the investment return you need to produce an acceptable retirement income and the asset allocation that will give you that return, and it is a delicate balance between emotions and financial reality.

When markets are rising, everyone is comfortable with their risk tolerance. I have known retirees who had their entire retirement portfolio in a handful of small company growth stocks—a powder keg of investment risk by any definition of risk.

Yet they were entirely comfortable with that risk, because the stocks they were in “always went up.” Anyone with a stock that “always goes up” either hasn’t held the stock during a bear market or only looks at their brokerage statements once every five years.


To find out what comfort really means when it comes to risk tolerance, it helps to define “uncomfortable.” While risk tolerance tests will ask you how far must your portfolio drop before you freak out and sell, the best way to find this out is when markets are in a free fall.

If you stay in the markets long enough to see them turn around and rise again, your risk tolerance was probably comfortable. If you sell out, it’s a pretty good indication your risk tolerance was not as great as you or your advisor thought. Unfortunately, selling out at a market bottom is a very costly way to find out the risk you had in your portfolio was “uncomfortable.”

A decade 

If you have been investing for over 10 years, finding your risk tolerance may be simple.

1. Think back to 2008-2009. Did you stay in the markets or get out?
2. Look at old statements and find out what percentage of your investments was in equities (owning things) and what percentage was in fixed income investments (loaning money through CD’s, money markets, and bonds).
3. Express this as a fraction with your equity percentage first and your bond percentage last. If you were 66% in equities and 34% in fixed income your asset allocation was 66/34.
4. If you stayed in the markets, your allocation was probably “comfortable.” If you got out, it was certainly “uncomfortable.”



If your allocation was 70/30 and you stayed in the market, maintaining that allocation should serve you well. Maybe you could even increase the equity portion to 75/25 or 80/20 and still be comfortable.

Conversely, if your allocation was 70/30 and you sold out or reduced the percentage you held in equities, your allocation clearly offered an uncomfortably high level of risk. You will need to reduce the equities in your portfolio. This is especially true if you got back into your old allocation, or something even riskier, to “make up time.” You may well be taking too much risk and setting yourself up for failure all over again. You will need to reassess


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2 Responses

  1. Not planning risks

    The average household aged 56 to 61 has just $163,577 set aside for the future, according to the Economic Policy Institute — but that’s not a particularly healthy number, especially if we follow the well-established 4% rule.

    So, if we apply a 4% withdrawal rate to that average sum, we arrive at just $6,543 in annual income, at least initially. And that’s nowhere close to enough money to live off, even if we factor in Social Security.



  2. The SECURE Act?

    A relatively radical bill moving through Congress will mostly eliminate passing on to heirs the benefits of tax-deferred and tax free IRAs. Why haven’t you heard anything about this money grab? Maybe because the bill has so much bipartisan support instead ofpolitical drama that the media is not paying attention.

    The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which would reform various aspects of US retirement laws, was approved almost unanimously (417-3) by the House of Representatives.

    The bill contains 29 new provisions. Despite its name, many of these provisions are anything but retirement “enhancements.” They will, however, enhance tax revenues flowing to the US Treasury.

    Among the revenue enhancements are changes to the rules regarding distributions from inherited IRAs. Currently, the required withdrawals can be spread out over the life expectancy of the heir—which, of course, could extend for decades. The new bill would requiremost beneficiaries to take the money out and pay the taxes over a ten-year period. (The Senate version would require a five-year payout period for any inherited IRA over $450,000.) The bill would exempt inheriting spouses and minor children from the provision.It seems to be lost upon Congress that the tax increases will impact the middle class much more than the wealthy.

    Another alarming part of the bill, included in response to heavy lobbying from the insurance industry, creates a safe harbor for annuities inside 401(k) plans. You read that correctly. Companies choosing to offer annuities would be shielded from liability nomatter how terrible an investment the annuity products may be. This provision has great potential for harm.

    The bill will also require all defined contribution plans, including 401(k)s, to estimate how much income would be generated by each participant’s current account value. How that estimate would be calculated is not specified. Questions about how to predictreturns—and whether accurate estimates are even possible—could keep experts debating for years.

    The SECURE Act does have some small positive provisions. Those who work past age 70 could continue making IRA contributions while they’re earning an income. The start date to take required minimum distributions from IRAs or 401(k) plans would change from age70 1/2 to age 72 (age 75 in the Senate version). The bill would also expand the ability of small businesses to reduce costs by joining together to create 401(k) plans.

    Another change is a $500 tax credit to smaller employers who encourage automatic enrollment in their retirement plans. Research shows that workers save more under automatic enrollment than when they have to affirmatively opt in. The contribution amount thatworkers could have automatically deducted from their paychecks would also increase from 10% to 15%. Penalty-free early IRA withdrawals up to $5,000 would also be allowed for plan owners upon the birth or adoption of a child.

    The good news in the SECURE Act is sparse at best. Relatively few people will want to work and make IRA contributions after age 70. Raising the age for required distributions is also minor. Making it easier for companies to set up retirement plans easier isa plus, except that so many already have plans in place.

    The negatives, however, are enough to support defeating the bill. Yet a defeat is highly unlikely. Lawmakers are apparently satisfied with the increased revenue—both to the Treasury from taxes and to their reelection campaigns from happy insurance companies.

    It is ironic that, amid the current partisan drama in Congress, when a piece of bipartisan legislation does get done, it’s uniformly bad for the very middle-class Americans that politicians of both parties claim to support.

    Rick Kahler CFP


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