If you think about your comprehensive financial plan as a long flight from here to retirement, then risk and uncertainty are like the turbulence, bad weather, delays, and cancellations that all travelers have to deal with. Sometimes, these disruptions flash on our radar well in advance. Sometimes, they pop up at a moment's notice. But understanding how your retirement flight plan is built to avoid, absorb, cope with, and even steer clear of certain challenges can reduce stress and help you enjoy the journey a bit more.
Let's talk about how my team at Keen Wealth approaches risk and uncertainty in our planning process and some strategies that can help folks stay on course for their dream retirement.
In financial planning, "risk" refers to the possibility that you will suffer a loss or receive a less-than-expected return on an investment (ROI). Most folks think of risk in terms of market volatility, meaning that as the markets go up or down, so does your potential ROI, whether that means an individual security or a group of investments inside an IRA or a 401(k).
However, there are other forms of risk that can affect these larger market movements and the health of your overall portfolio. For example, by investing in a bond, you're exposed to credit risk: if that company or issuer were to default on its debts or go bankrupt, that would most likely result in a loss on your investment.
Some folks try to mitigate market risks by investing in hard assets like real estate, art, or luxury vehicles. But these kinds of investments carry liquidity risk: if the housing market is struggling or if dealerships are stocked with used cars, you might not be able to sell these investments easily, let alone at a profit.
Seniors nearing retirement age often worry about “sequence of return” risk: the possibility that market volatility will hurt their nest eggs just as they're preparing to transition to a fixed income. There is also the risk of outliving your money if your investments aren’t allocated to outpace inflation over a long retirement.
All these risks are legitimate concerns and challenges. But if you're working with an experienced fiduciary advisor, risks are almost always identifiable and, to an extent, quantifiable. Our Advisors can use the decades of market data at our disposal to run complex computer simulations and statistical analyses that help us identify likely outcomes over extended periods of time. We can use that data to put up some potential safeguards against high volatility -- such as diversification and rebalancing parameters. We can also identify opportunities in risks, such as "buying low" when the market is down. And once we've established some general guidelines for a portfolio, we can factor in a person's specific assets, goals, and personal risks (such as a known healthcare issue) to create a more personalized plan.
Planning for risks you can anticipate also gives investors more tools to plan for things they cannot anticipate. That's the difference between risk and uncertainty.
For example, heading into 2023, we knew there was a risk that the ongoing war in Ukraine could continue to affect the price of consumer goods and energy, which could ripple through the markets and create volatility. But a second major war breaking out in the Middle East, or an earthquake, or a pandemic are uncertainties. We can't quantify these events because, unlike risks, we can’t say with a high degree of certainty that they will happen.
That also makes it harder to game out the potential consequences of uncertainties. COVID decimated the value of many businesses, but it also opened lanes for nimble companies to make a digital pivot and grow. AI could have a similarly unpredictable impact, putting some companies out of business while creating exciting investment opportunities in others.
Our lives are also full of uncertainty, even when things are seemingly going well. A distracted driver blows through a stop sign, and everything changes. At a routine checkup, your doctor spots something troubling in your spouse's bloodwork. Your basement floods. Your roof starts leaking. Your employer has a bad quarter, and you're forced into early retirement.
3. A plan you can rely on
Uncertainties can impact a financial plan as much as -- if not more than -- the Dow Jones Industrial Average.
While my team at Keen Wealth can't predict a sudden health crisis, we can help you secure healthcare coverage during Medicare's annual Open Enrollment period.
We can't predict a job loss, but we can create emergency cash reserves to help you cope during that tough transition if it were to happen.
We certainly can't predict a date of death for you or your spouse, but we can help you put together an estate plan that will honor your wishes and care for your family when that time comes.
And, in the conversations we'll have throughout our comprehensive planning process, we can help you gain a healthier perspective on the differences between the things we can and can't plan for. Folks who conflate manageable investment risks with life's uncertainties are only opening themselves up to more risks: the risk of making emotional investment decisions, the risk of letting factors you can't control harm things you can control, the risk of working longer than you have to or enjoying retirement less than you deserve to.
If you call up Keen Wealth and schedule an annual review meeting, we can help you separate your risks from your uncertainties and prepare your 2024 financial plan for both. Let’s talk about how our comprehensive planning process could make you feel more informed, more in control, and more confident about your money in the year ahead.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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