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Your Retirement Income Projection Part 2: Risk Analysis

The Second Step in Your Comprehensive Written Retirement Income Plan

This article is part two of a three-part series in which we’ll dig deeper into the first aspect of 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 is Important

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: What Type of Retiree Are You?


Risk Analysis: Hypothetical Example

Let’s revisit Bob and Carol, the 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 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 the risk. If their $1,600,000 loses -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: Answer These Three Questions to Know What You Really Want Out of Retirement


A Plan to Better Manage Risk Analysis

Bob and Carol’s new plan for asset allocation, which we shared here, includes placing $800,000 into Bucket #1, $100,000 into Bucket #2, $500,000 into Bucket #3, and $200,000 into a 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 With 10% StopLoss” 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 Analyzed Your Risk?

If you’re like a great many retirees, you’re 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

DISCLOSURE:

All of the information presented here is provided and intended to be used for general educational and informational purposes only and is not intended as a solicitation for you to buy or sell any financial product. None of the information presented is intended to give you specific tax, investment, real estate, legal, estate, or financial advice but rather to serve as an educational platform to deliver information. The ideas, thoughts, and strategies presented here are those of the Management Team and provide an insight to our views on Peak Financial Freedom Group, LLC. Every detail in this website is subject to change without notice. Seminar, radio shows, TV productions, book releases, magazine and book promotions are sponsored, promoted and paid for by Peak Financial Freedom Group, LLC.


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 $1,000,000 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.


All investments involve risk, can involve the loss of principal, and unless otherwise stated, are not guaranteed. Past performance is no indication of future performance and such information cannot be relied upon regarding future potential gains. Nothing is directly or indirectly guaranteed by this information. The planning and ideas presented herein are not suitable for all individuals or situations. Hypothetical examples are used to explain concepts and are not indicative of potential results you could receive; past performance is not a guarantee of future results; and results are not indicative of any particular investment or income tax situation; your results will be different and could be lower or higher. Consult your financial professional before making any investment decision. Insurance product features and benefits, such as guaranteed lifetime income riders, are subject to contract terms, limitations, fees, and the claims paying ability of the insurance company issuing the contract. The sale or liquidation of any stock, bond, IRA, certificate of deposit, mutual fund, annuity, or other asset to fund the purchase of any other asset including an annuity may have tax consequences, early withdrawal penalties, or other costs and penalties as a result of the sale or liquidation. Different assets can be complex and carry fees, costs, and surrender charges. If you place assets under management with Fiduciary Solutions
LLC, we are paid an advisory fee from Fiduciary Solutions LLC and if you purchase an annuity through us, we are paid commissions from an insurance company.


2019(1), 2020(2), 2021(3), and 2022(4) Five Star Professional Wealth Manager Award - Dan Ahmad and Jim Files have been nominated for and have won the 2019, 2020, 2021, and 2022 Five Star Wealth Manager Awards. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. Once awarded, wealth managers may purchase additional profile ad space or promotional products. Award does not evaluate the quality of services provided to clients. The Five Star award is not indicative of the wealth manager’s future performance. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. Award winners represent an exclusive group of wealth managers who have demonstrated excellence in their field by satisfying 10 objective selection criteria. For additional information on the Five Star award, including a complete list of the 10 objective selection criteria and their research/selection methodology, go to https://fivestarprofessional.com.


Investment advisory services are offered through Fiduciary Solutions, LLC, a California Registered Investment Advisor. Insurance products and services are offered through PFFG Insurance Agency LLC, a licensed insurance agency (CA Insurance License #0N14013). Peak Financial Freedom Group LLC is a financial planning and umbrella marketing organization, which enables the provision of multiple financial services under one brand. Peak Financial Freedom Group LLC, PFFG Insurance Agency LLC, and Fiduciary Solutions LLC are affiliated entities with common ownership and control.


Jim Files is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD #1620449) and is a licensed insurance producer with PFFG Insurance Agency LLC (CA Insurance License #0F06511). Dan Ahmad is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD # 1491561) and is a licensed insurance producer with PFFG Insurance Agency LLC (CA Insurance License #0732913).

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