In this week’s Money Wisdom Question Series, Ian Fergusson, RICP® addresses a fundamental concern for anyone approaching or in retirement: What level of risk is appropriate for my retirement plan?

There is no blanket answer to what the most appropriate risk is – it’s a very dynamic, moving target. Every individual, couple, or family will have a unique level of risk that aligns with their financial goals and personal comfort level.

Defining Risk Tolerance

To get to the heart of the matter, we need to define a couple of key terms. The first is risk tolerance, which is your willingness to take on risk from a behavioral and psychological standpoint.

For example, if you lean more conservatively, but you’re invested aggressively in the market, then there’s a disparity between your investments and your personal comfort level with risk. On the other hand, if you’re okay with market fluctuations but invested too conservatively, you might miss out on a long-term rate of return that better matches your comfort level.

Understanding Risk Capacity

The next term to understand is risk capacity, which is a financial and numerical calculation that determines your ability to take on risk.

If you’re earlier in your retirement savings journey and haven’t yet accumulated a large nest egg, your capacity for risk might be more limited. Conversely, if you’ve accumulated substantial assets, your capacity for risk is likely higher. This varies widely from person to person and must be evaluated individually.

Considering Risk Placement by Account Type

Another important consideration is where your risk is located, especially from an account type perspective. When the team at Johnson Brunetti designs, implements, and maintains financial plans for those entering and living through retirement, we ensure that each account type fits appropriately within the broader strategy.

Not only does each account serve a purpose in the overall structure, but it should also carry a risk profile that aligns with both the type of account and the role it plays in your retirement plan.