Briefcase Study

In Articles, Articles: Kansas City Office, Briefcase Studies, Tax Planning, Winter 2019 by Scott Dougan

When 2018 came to a close, the month of December was not without drama. The stock market was suffering meaningful declines. There were quite a few days of 500, 600, and 700-point losses. With this much volatility, it leaves a retired or retiring investor to ask, “Who am I, as an investor? How should I be investing when markets can be so wild?”

The short answer is: it depends. The way you choose to invest in the stock and bond markets (bonds can lose money too) has everything to do with the plan you’ve built for your retirement. As was the case with many of our clients during the last few months, we had an opportunity to discuss these very questions with one couple in particular. While I won’t name names, their circumstances may prove helpful to you as you consider your investing approach.

Ted and Dot (not their real names) plan to retire next year, in 2020. They’ve done a fantastic job saving for retirement, and have built a plan that includes enough guaranteed income sources to allow them to live comfortably without having to invest their retirement income money in risk-based investments. In other words, the money they do have invested in the markets is not required for them to meet their essential lifestyle costs (needs). The risk-based money is there for discretionary spending (wants).

When the stock market continued to lose value, Ted and Dot sent me a couple of emails, questioning whether they should still keep their risk-based money heavily invested in stocks. After all, they’d accumulated enough money already and wondered whether they needed to continue to take so much risk with their hard-earned savings. We agreed to meet to have a thorough discussion and revisit their plan.

As a point of interest, consider this: there is something called risk tolerance and there is also risk capacity. The difference may seem subtle, but it’s not. A person may have a high degree of risk tolerance, meaning they don’t mind seeing losses for a period of time in order to realize long-term growth on their money. However, they may lack risk capacity, the ability to successfully reach their goals should losses occur. While it’s one thing to be okay, psychologically, with risk, it may not be okay financially to keep money at-risk. I hope you can see the difference.

Back to Ted and Dot. When we met, we reviewed the retirement plan that we’d developed and had been committed to. In doing so, they were reminded that their retirement income was secure, regardless of the market’s performance. This meant they either 1. No longer needed to take risk with their discretionary money, or 2. They had the risk capacity to remain heavily invested in stocks. After all, they don’t ‘need’ the money anytime soon, so they can ride-out choppy markets when they come.

In light of this planning review, they were reminded that they plan to leave a financial legacy for their children and grandchildren. As a result, they chose to not only remain in stocks, but to increase their exposure to stocks! As they reasoned, some of this money would not be accessed for 30 or more years, so why not reap the benefits of some prudent risk-taking?

I share this with you not so you’ll do what Ted and Dot did with their investments, but to engage you in a thought process. Each investor has a risk tolerance and risk capacity that is unique to them. Sometimes a poor season in the markets is a wonderful gut-check to ensure that planning and intentions are aligned.

If you’d like to engage in a similar planning discussion, please contact us. Getting all of the pieces fitting together – risk, income, taxes, estate – is a wonderful antidote to scary headlines.