: Risk analysis is the important second step in developing your comprehensive written retirement income plan.

Your Retirement Income Projection Part 2: Risk Analysis

The Second Step in Your Comprehensive Written Retirement Income Plan

The following article is part two (risk analysis) of our three-part series on the critical steps involved in preparing your comprehensive written retirement income plan: the retirement income projection. This series is based on content that originally appeared in our book, Momma’s Secret Recipe for Retirement Success, and you can grab your copy here.

In our last installment, we shared details on the very first step in developing your comprehensive written retirement income plan, which is a retirement income analysis. As a reminder, this series is all about completing the three aspects that makeup step one in our four-part process of completing your Retirement Income Projection:

  1. Income analysis
  2. Risk analysis
  3. Fee analysis

In this article, we’ll walk you through the risk analysis step.


Why Risk Analysis Matters

We have found the vast majority of retirees are taking far more risk with their assets than they thought they were. This is because most retirees we meet with have never had a risk analysis completed for their current portfolio showing how much money they could potentially lose in the next significant stock market downturn. Another factor may also be because their current advisor may not want to complete a risk analysis to tell the retiree how much risk they were really taking, which we have quite often found to be much more than they prefer to take.

SEE ALSO: Do You Know the Two Stages of Money in Retirement?

Hypothetical Example

Let’s revisit Bob and Carol, the hypothetical couple we used as our example in our last article, too. Bob and Carol thought they couldn’t lose more than -10% in their portfolio if the market crashed like in 2008.

We completed the following risk analysis for Bob and Carol’s current portfolio:

First of all, they said their current advisor had never summarized their assets like this before so that they could “see” what they actually owned. We used a sophisticated software program that allowed us to enter in every individual stock, bond, exchange-traded fund (ETF), and mutual fund they owned. The software calculated how much Bob and Carol would lose if we had a stock market crash similar to the 2008 Financial Crisis, when the stock market lost -53.8%.

The $20,000 Bob and Carol had in the bank wouldn’t lose anything. The program concluded Bob and Carol would lose -50% of the $1,580,000 in their stocks, bonds, mutual funds, and ETFs if we had another 2008-type stock market crash.

This means their $1,580,000 nest egg would lose -$790,000, making their risk -49.4%. If you’ve read up on our Golden Rule Of 5% To 10% then you know they are taking on way too much risk, as they should be between -5% to -10% of risk. If their $1,600,000 loss is -49.4% they will have $810,000 left. The $810,000 will have to earn +97.5% just to break even, assuming they don’t take out any income and they don’t pay any fees.

This is not acceptable.

SEE ALSO: Annuities 101: A Primer on a Polarizing Term

A Plan to Better Manage Their Risk

Bob and Carol’s new plan for asset allocation, which we shared here (hyperlink to Part One), included placing $800,000 into Bucket #1, $100,000 into Bucket #2, $500,000 into Bucket #3, and $200,000 into self-managed stock account.

If we had another 2008 Financial Crisis and the stock market dropped -53.8%, here’s where Bob and Carol would stand:

  • Their “Bucket #2 Liquidity & Safety Cash” holding $100,000 in the bank won’t lose anything (-$0), as the bank funds are 100% protected against all stock market losses.
  • Their “Self-Managed Assets Stocks” holding $200,000 of stocks managed by Bob and Carol are projected to lose -50% which is a loss of -$100,000.
  • Their “Carol’s IRA Bucket #3 Growth Managed Portfolio” holding $500,000 of professionally-managed ETFs are projected to lose -10% which is a loss of -$50,000.
  • Their “Carol’s IRA Bucket #1 Guaranteed Lifetime Income Fixed Index Annuity” holding $400,000 won’t lose anything, as fixed index annuities with income riders are 100% protected against stock market losses.
  • Their “Bob’s IRA Bucket #1 Guaranteed Lifetime Income Fixed Index Annuity” holding $400,000 won’t lose anything, as fixed index annuities with income riders are 100% protected against stock market losses.

So, to summarize, Bob and Carol’s new portfolio had a total projected risk of loss of -$150,000, which is a -9.4% risk factor, an acceptable level of risk that fits within the Golden Rule Of 5% To 10%.

If Bob and Carol suffer a -$150,000 loss that decreases their $1,600,000 to $1,450,000, their new portfolio will only require a recovery gain of +10.3% versus their original portfolio’s +97.5% required recovery gain. Bob and Carol understood their actual losses could be higher or lower, of course, but they were much more comfortable with the lower projected risk in their new asset allocation plan.

Have You Completed a Risk Analysis?

If you’re like a great many retirees, you may be taking on far more risk than you realize. Give us a call today to discuss a professional risk analysis that can ensure you’re protecting your retirement nest egg.

In the next installment of this series, we’ll continue the retirement income projection process with step three: fee analysis. Need more valuable retirement planning content in the meantime? Check out our blog and radio show!

Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661


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2nd Opinion Package available to Qualified Retirees and Soon-To-Be-Retirees may include free consultations, a free retirement income plan, risk analysis, and fee analysis. In addition, a comprehensive written retirement income plan may be provided to those who complete the entire process. Qualified Retirees and Soon-To-Be-Retirees must have a minimum of $500,000 of investible assets such as IRA’s, 401K’s from past employers, stocks, bonds, mutual funds, bank accounts, money markets, CD’s, etc., but DOES NOT include real estate, businesses, limited partnerships, 401K/retirement plans that can’t be moved to another plan, and other illiquid type assets.

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