Preparing for retirement is something all adults should consider, no matter their age. Getting started as soon as possible helps to increase the time a person has to prepare. One of the aspects of financial and retirement planning is assessing a person’s risk tolerance. With this guide, individuals will learn more about their options and how they can plan carefully when investing for their retirement.
Understanding Risk Tolerance and Why It Is So Important
A person’s risk threshold is the amount of risk they are comfortable taking with financial planning. Those who have a higher level of disposable income are going to feel more comfortable taking bigger risks. Before a person begins investing for their future, it is essential they assess their willingness to take risks in their investment options.
The basics of risk involve understanding the greater the risk, the greater the gains. Because many investment strategies do not always end favorably, individuals chasing large gains also place themselves at risk of losing a lot more due to greater risks. Before a person begins investing, they need to weigh the bad with the good and determine how comfortable they feel with levels of investment risk.
A person can best determine their willingness and comfort with taking risks after they perform an honest assessment of their needs, goals, timelines, and investor psychology. It is also essential a person understands the different levels of risk that are involved in investment strategies so they will be prepared to allocate their accounts within their comfort zone. Once a person understands their tolerance level, they can pursue increasing their retirement savings.
Levels of Risk Involved in Investing
There are varying degrees of risk involved in any type of investment strategy. Individuals must be aware of these levels and determine which they feel comfortable embracing. The following offers a breakdown of the different levels of risk.
High Levels of Risk Tolerance
Individuals who are willing to take significant risks can obtain greater payoffs. People who feel comfortable with bigger risks will often invest in lesser-known stocks that have the potential to offer big gains but also the possibility of greater losses. Investors with a high risk tolerance will take bigger chances and roll with the punches, whether there be good or bad outcomes. This is generally appropriate for funds that have a longer timeline prior to their intended use.
Moderate Levels of Risk Tolerance
Some people can tolerate a moderate level of risk. People who can live with this level of risk will likely invest in a way that requires a reduced level of risk. These allocations are likely to produce gains but do have some potential for losses.
Low Levels of Risk Tolerance
There are also some investors who simply cannot tolerate risks or they have identified a portion of their portfolio that they want insulated from market volatility. For these funds it is important to find a solid investment that protects principal but still offers the potential for positive returns. Investments with a low level of risk often struggle to outpace inflation over the long run but are safe from market losses in the short-term, making them ideal for funds with a shorter timeline before use.
What Should Investors Consider When Assessing Their Risk Thresholds?
There is a lot to consider when a person is assessing their risk threshold. When a person is considering the amount of risk they are willing to take, it is important they are honest with themselves and practical. A person who is unsure of their risk threshold should ask themselves the following questions to gain a better understanding.
- What is the potential for income increases over the coming years?
- Does the individual have worries concerning the stock market?
- What type of lifestyle does the person want to obtain?
- At what age does the person want to retire?
Each person is different regarding their risk threshold. It is important to assess risk options carefully to ensure a person feels comfortable with the level of risk they are taking. By taking the greatest risk a person feels comfortable with, investors can develop a plan that they can stick with through different markets which can help them strive to get the biggest gains possible.
Getting Help From a Professional Is Essential
Seeking help from a retirement counselor is one of the most important things a person can do to prepare a plan that helps you balance risk within your portfolio. An advisor will help individuals understand their budget and the options that are available to them for investing. Financial advisors help with the following.
- They will work to create a customized investment strategy.
- Help you strive to lower the risks investors face.
- Also help individuals minimize their taxes.
- Help individuals to avoid making decisions based on emotions.
Schedule an appointment with our team of retirement professionals to ask questions and learn valuable information that will assist youin preparing an investment strategy. Now is a perfect time to get started.
Walker Capital Preservation Group works to ensure federal employees receive the retirement and tax guidance they need for planning their retirement and the underlying investment strategies. They assist their clients with insurance planning, retirement planning, benefits coordination, and tax planning.