09 Jan Do I have too much of my retirement savings in stocks?

Q. I have always managed my own portfolio with mutual funds. I have about $1.2 million and it’s 80% in growth investments and 20% in value. I’m turning 60 next year and I’m not sure when I can retire but how do I know if I’m being too risky? I started saving later in life so I feel like I need to play catch-up but now I’m wondering if I’m risking too much.
— Investor

A. We bet your portfolio had a good year for 2023.

When making an investment plan, it is important to think about both risk and return.

Often investors get into trouble when they only focus on maximizing investment returns without considering the investment risk and their own risk profile, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.

He said your risk profile depends on several factors that broadly fall under two categories: your ability to take risk and your willingness to take risk.

Your ability to take risk consists of factors such as age, cash flow, net worth, health and more. Your willingness to take risk is your personal comfort level with risk.

Having said that, Panambur said, one should never take any risk that could lead to permanent loss of capital.

“Speculation and bad timing lead to permanent loss of capital,” he said. “The latter is especially true with retirement planning because when you invest for retirement it is not only the expected returns that matter but also the timing of those returns so that your investments support the withdrawals that are required to sustain your lifestyle.”

Once you understand your “risk profile,” you must ensure that your investment risk matches your risk profile, Panambur said.

“The volatility of asset classes statistically measured by their standard deviation is often considered a proxy for investment risk,” he said. “However, it is not a perfect measure of risk which is why you need to perform scenario analysis.”

Financial advisors use Monte Carlo simulations in which inputs such as the expected return of your portfolio are changed, and the probability of retirement success is calculated over 1000 or so scenarios, he said.

“Financially speaking, your retirement is a success if you do not outlive your money and you are able to meet all your goals and objectives,” he said. “A diversified portfolio that is balanced across various asset classes and styles usually leads to a higher probability of retirement success.”

If you determine that you are falling short in your retirement goals, the solution is not to take more risk than is appropriate for your situation, Panambur said.

“There are several other reliable levers to pull when it comes to retirement planning such as working longer, spending less, creating tax efficiencies by opportunistic Roth conversion, income management, optimal social security strategy, efficient withdrawal strategy, healthcare strategy and more,” he said. “You will need to consider all these in a holistic manner to improve the chances of retirement success.”

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This story was originally published in January 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.