Risk Tolerance Tests Should be Part of Your Financial Profile

An Understanding of Risk Tolerance Can Provide the Guardrails on Your Retirement Road

Two concepts that retirement planners nearly universally agree upon are that one, clients’ portfolios are more risk-exposed than they realize, and two, that women risk tolerance test results appear are more consistent than men when implementing their investment strategies. It’s not exactly science, but like psychonomics. These conclusions result from not only qualitative conversations between planners and clients, but perhaps more importantly, quantitative, question-based software tests that measure risk tolerance. Though widely available, the tests are vastly underutilized.

Baby Boomers, especially, can benefit from taking a risk tolerance test, using the results to guide their allocations as they near retirement. Boomers simply cannot take another hit like 2008, when some accounts declined over 35% - 50%. Some are shocked to discover that their portfolios have crept back to excessive risk levels, but by knowing their tolerances – what they’re willing to risk for a return – they can plan appropriately.

A highly desired outcome of risk tolerance testing is identifying a “safe-money” asset percentage, the portion of the portfolio that is not to be at risk due to advancing age, market volatility or limited recovery time.

Once the percentage or dollar amount is determined, fixed index annuities are an increasingly popular option for safe-money allocations. Issued by insurance companies, annuities can render multiple benefits: guaranteed lifetime income; protection against loss and moderate growth with perhaps 3%-6% return over 5-10 years based on highly visible indexes, such as the S&P 500. Annuities can also track foreign indexes, and can appear in both qualified and non-qualified plans. Investors do not participate in dividends, and liquidity could be limited in early years.

A side benefit to risk tolerance testing as it correlates to fixed index annuities is the comfort of knowing that one’s assets are age-appropriate. Investors generally know that they own assets like stocks or different fund types, but often lack knowledge about their purpose or specifics. With risk tolerance as a guide, assets can become more conservative with age, acting as a buffer against time and volatility.