How Age Affects Your Financial Plan: 3 Scenarios in Your 50s

When you first begin saving and investing for the long-term, a retirement goal that is two, three or even four decades away seems more abstract than real. But, when retirement is only 10 years (or less) away, your goal can materialize into a financial finish line, or morph into a draining hourglass.

As financial advisors in Atlanta who work with a large and experienced team of colleagues, we've seen too many retirees lose money they didn’t have to lose.

Between the ages of 50 and 55, it’s very important to make sure that all aspects of your financial picture are well-aligned with your retirement goal, especially as it pertains to your risk tolerance.

To get started, use this guide to start a discussion with your financial advisor, so you can ease into retirement easily, rather than experience a rough landing when you stop working.

What is Risk Tolerance?

It’s important to know what risk tolerance is, its significance and its use. Simply put, risk tolerance is a measure of how much portfolio fluctuation you can appropriately and emotionally endure as an investor, before you need to sell or change your investment strategy. Your risk tolerance greatly influences your portfolio’s investment mix.

We have found in our nearly 50 years of working with clients that most investors' risk levels typically fall into one of three basic categories: Aggressive, conservative, or low. Let’s examine what each looks like when you’re in your 50s and retirement is a just a decade or so away.


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Aggressive: Give Yourself Time and Financial Space

An aggressive portfolio indicates the highest risk level for your investments, while offering the most investment growth potential. An aggressive portfolio is typically comprised mostly of stocks, with little to no bonds. This includes large-cap, small-cap, domestic and even international stocks.

Having a high-risk tolerance for an aggressive strategy means you are comfortable mirroring (or nearly mirroring) the regular fluctuations of the stock market. Take the S&P 500 Index, for example. This index is a group of 500 large, U.S. based stocks, consolidated to represent the value of big companies in America. As of mid-October 2020, the S&P 500 has swung 63 percent (52-week range), and aggressive investors were taken along for the ride. That represents a significant "roller coaster" ride, and like a roller coaster, it's not a good idea to jump off when the big swings are taking place. 

What an Aggressive Risk Tolerance Can Look Like

An investor who is comfortable with an aggressive portfolio generally should have some form of a buffer, be it a long-time horizon or a financial cushion to fall back on if they experience a major loss in investment value. This is in addition to the intestinal fortitude needed when experiencing intense market volatility.

We recently had this discussion with “Michael,” a 55-year-old manager with a major insurance company, who is considering an aggressive portfolio to help him reach his retirement age of 65, if not earlier. After some in-depth conversation, it was revealed that while Michael would be happy with the potential investment gains of an aggressive portfolio and the possibility that this can lead him to retiring sooner, but he also confessed that he would quickly cancel his investment plan if his portfolio lost 20 percent in less than one year (which is more likely than many people realize), going from $1 million to $800,000.

Though Michael has a goal of retiring sooner by investing aggressively, his risk tolerance may not be high enough and could cause him to prematurely sell his investments, leaving him worse off. A better solution may be to save more each month while maintaining a moderate portfolio allocation, or finding a different mix of investing, saving and goal-setting.

Conservative: Slow and Steady Can Win Your Race

Conservative portfolios fall on the other end of the spectrum and are typically composed of a mix of lower-risk investments like bonds, with a low percentage of domestic stocks of large companies.

Why? Bonds are typically seen as a “safe haven” investment and typically move somewhat in opposition to stocks. When investors are uncomfortable with stocks, they flood their investments into bonds, holding up, or even driving up bond prices. When investors believe the stock market is booming, bonds are seen as less valuable, meaning they will not enjoy the gains being seen in the stock market. These two basic investments therefore complement one another.

Due to the lower risk that conservative portfolios offer, the returns are understandably lower. Investors who harness a conservative portfolio likely have a lower tolerance for risk, possibly having shorter time horizons, and will need to use the money they’re investing within a few years or less.

What a Conservative Risk Tolerance Can Look Like

A few months ago, we met with “Betty,” a 57-year-old private school headmaster, who has worked hard to save during her career and is looking to retire at age 65. She has utilized her school's 403(b) plan for her retirement and built a sizable emergency savings.

After discussing her retirement plan with her, we determine that monthly spending of $5,200 can be easily funded by her personal and retirement savings at 65, and her Social Security payments will give her a solid layer of protection thereafter. She is comfortable taking a small amount of risk to make more money than a bank’s savings account or CD offers. Thus, a conservative portfolio could be a good fit for Betty’s risk tolerance and target retirement date.

Low Risk: Investment Safety is More Important Than Gains

At a certain point in your financial life, you may find yourself in the unique position where it may not be worth it to take any significant investment risks with your savings. While all investors like to see their money grow, sometimes risk is out of the question. We occasionally run across client profiles like this.

Though aggressive and conservative portfolios are straightforward with the amount of returns they can generate over the medium- to long-term, if you have a low risk tolerance, you are likely more interested in seeing your assets preserved, growing only by the fresh deposits that you make and making any additional gains a nice-to-have perk. Or, as American humorist from the past century Will Rogers used to quip: "I'm more interested in the return OF my money than the return ON my money!"

This intersection point of asset preservation and light gains may be achieved with bank-insured or government-backed securities, like a multi-year bank CD, money markets, short-term U.S. government bonds or treasury bills. Returns may not be high, but capital preservation is emphasized.

What a Low Risk Tolerance Can Look Like

Consider “Kendall,” a 55-year-old field office manager for a pharmaceutical company who plans to retire no earlier than age 65. She is preparing to pay her youngest child’s first year of college tuition in two years. Though Kendall can handle the emotional and financial ramifications of a moderate amount of risk, she prefers not to subject the money she set aside for tuition to any risk at all.

For these funds, a low risk investment is a must for Kendall. It’s more important that the fundscompletely unrelated to her retirementremain intact and not be subject to potential for a significant decline in value. Sometimes, your specific financial goals heavily impact what your maximum risk tolerance can be, rather than just your emotions.

Where Do You Fall?

As the aforementioned scenarios in this article have illustrated, every investor is different. Not only are your circumstances unique, but your financial goals and retirement needs can add even more complexity to your situation. Therefore, your financial plan and investments must align with your specific financial objectives and fit your own personal risk comfort level.

Quantifying your risk tolerance isn’t easy – and it’s not always what you think! A fiduciary financial advisor can help make this process easier. At Linscomb & Williams, our clients’ risk tolerance is foundation to what we do, allowing us to help you invest confidently and take much of the guesswork out of your financial future.

If you’re getting close to retirement or are concerned about your current plan, contact Linscomb & Williams to see how we can help.


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Heidi Davis, CPA/PFS, CFP®

Heidi Davis, CPA/PFS, CFP®

Heidi Davis is a Managing Director and Wealth Advisor at Linscomb & Williams.

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