I recently did a radio show and the topic was types of risk that many people will face in retirement. The main two that I want to go over today is Market Risk and Inflation Risk. Both of these can take a toll on your retirement investments.
Market Risk
Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which he or she is involved. Market risk, also called “systematic risk,” cannot be eliminated through diversification.
This type of risk is usually an unknowable or unforeseen event that has happened. Let’s look at some recent events. The last one was the 2008 crisis. It affected the whole market so when the crisis unfolded, the whole market went down. You could not have diversified against this. Think about it this way. You could have had a diversified portfolio but it did not help. The tide was low and went out on all ships. Another unknowable event was 9/11. This also had a negative effect on the whole market. It started with the airlines not flying and trickled throughout the whole market. Almost everything went down in value.
Inflation Risk
The other risk is Inflation. If you do not plan for inflation, you could go broke slowly. We all know prices go up over time, but why don’t most people factor inflation and the need to increase their income once retired? Let’s look back to 1998. The price for a gallon of gas was about $1.06 per gallon and the price for one stamp was 32 cents. Fast forward to today a gallon of gas in my area is $2.59 a gallon and a stamp now is 50 cents. Point being, this was 20 years ago and if you are about to retire you should plan on being retired for the next 20 years or longer. Chances are you have a great chance on living longer than 20 years in retirement.
So how do you plan for both these risks?
The answer is a Simplictree report that will give you the confidence and clarity that is needed to go into retirement. In our plan we always accountfor inflation. We will build an inflation rate into your income, so you can keep up with the rising costs of goods. How else can you keep your income on pace with inflation? This is a risk that you can plan for and should plan for.
Let’s circle back to Market risk. There is a saying that goes like this. Stock prices lie but dividends tell the truth. How does this relate to income? There are companies that historically have paid dividends every year for over one hundred years. Yes, even in down markets. If you have a portfolio that has dividend paying stocks there is a good possibility, that even in a down market, your dividend income will continue to come in and typically go up with inflation. Let’s look at AT&T for example. They have paid a dividend every single year since 1881. They pay a dividend for every share you hold regardless of the ups and downs of the stock price. Meaning your investment value will go up and down with the stock price but your dividends will still come as income regardless of the ebbs and flows of the market. I know what you are thinking. Did they pay dividends in 2008? The answer is yes. Dividends are not guaranteed but they are predicable. By using big boring companies that have paid dividends over a long period of time is how you can have income in a down market and feel good about your portfolio. That in a down market your portfolio is still giving you the income you need going forward. Think about that for a minute. Would this give you confidence? Would this help you sleep better at night? If the answer is yes then we invite you to give us a call and get your Simplictree report.