Investment Risk is Nothing Compared to These Risks
INVESTMENT RISK IS THE IDEA THAT YOUR INVESTMENTS WILL SUFFER LOSS. Your losses could be small or big. They could be over quickly or occur over a long time. Losing money on your investments, particularly at the wrong time, can force you to change your plans. This a real risk! To avoid heartburn and sleepless nights, it’s smart to make sure your investments match the level of risk you can handle.
BUT PEOPLE FACE GREATER RISKS THAN INVESTMENT LOSS. I have worked with many people over the years and have seen how life itself poses a greater risk to an individual’s future plans than the markets. Years of planning can seem like wasted time with an unfortunate turn of events or a poor decision. If you can avoid these developments, your chances of success in retirement increase significantly:
JOB LOSS. This can be financially devastating at any age. For many of us, our quality of life today and our hopes for our future are tied directly to what we earn. But for those ten to twenty years away from retirement, losing work during prime earning years can turn retirement plans upside done. A job loss can force many to entirely shut down saving for their future – and during times when they were planning to save the most! Some may need to take on new debt. Sustained unemployment or new work at less income can result in retirement funds being accessed just to pay the bills!
HEALTH. I suppose this goes without saying. Don’t we all know someone who was moving along with their life, approaching some liberating event like the kids moving out or retirement, when a health challenge interrupts their plans. Suddenly, all they had planned for doesn’t seem to matter much. I have seen this in my Family. My uncle passed away as he was in the midst of transitioning into retirement. My aunt was forced to create a whole new future – without her life partner.
DIVORCE. When a couple splits prior to retirement, this can certainly damage their individual finances. The same amount of resources which supported one household now need to support two. Assets are divided and will need to cover long-term expenses that would have otherwise been shared. Pensions may need to be split – assets may be sold at inopportune times.
BUSINESS. Establishing your own business, or going into business with someone, can seem glamorous. We hear of those who “persevered” and were rewarded with the success and satisfaction that comes with owning and growing your own business. But sadly many fail. To go into business, they may have given up the steady income of a job and invested their own money. They may have used their retirement funds, or other savings, or borrowed to make it happen. It may worsen as the business fails. It can be hard to let go and move on and the financial costs grow. Rebuilding financially as well as emotionally can take years.
FAMILY. Children, grandchildren, and other extended family provide much of the joy in our lives. For some pre-retirees, family needs can ultimately overwhelm their ability to save for their own future. There appears to be more financial dependence today from younger generations on older generations than there had been in the past. Children or grandchildren struggling with instability and personal challenges weigh on the minds of most parents and grandparents. It is difficult for some to turn their back on those they are closest to. I see clients all the time make their own personal and financial sacrifices to help their children.
DON’T IGNORE YOUR INVESTMENT RISK. It’s silly to be glib about the money you have earned and saved for your future. But a smart, well-diversified low cost portfolio that becomes more conservative as you get closer to retirement can be protected. On the other hand, the risks of life itself, whether it is the result of bad luck or poor judgement, can wreak havoc on an otherwise solid retirement plan.