3 Questions that Make Creating a Retirement Investment Strategy Easier

Crafting a retirement investment strategy can be a daunting task for many people, even when they have a great financial advisor. Between the financial goals being set and the possible scenarios being accounted for through retirement planning, it’s easy for your clients to become overwhelmed and disoriented.

The best way to help your clients is to keep conversations about retirement strategy simple. In spite of all the variables you’re trying to account for, you can help them organize their thoughts and decision-making by encouraging them to slow down and focus on answering three key questions.

1. What is your risk tolerance?

“What is your risk tolerance?” is another way of asking, “Where is your panic point?” Often, people will see the market dip and panic and pull their money out. When this happens, they forfeit the opportunity to let the market recover and gain some (or all, and then some more) of their money back.

If your clients think about their risk tolerance ahead of time, they are less likely to make rash decisions. Have your clients ask themselves, “What’s the loss amount that is unacceptable for me?” Calculate this risk tolerance on a monthly, quarterly, and yearly timeline.

Risk tolerance also needs to take into account each client’s desired retirement date—the closer they are to retirement, the less risk-tolerant those clients will likely be, because they’ll have less time to let their finances recover if a market correction or downturn cuts into their investment value.

2. What is your risk capacity?

Risk capacity is the ability to achieve your retirement goals no matter where the market stands. Unlike risk tolerance, risk capacity is grounded in fact. Your clients have mapped out goals for retirement (e.g., such as spending time with grandkids and traveling) and know how much money they can afford to lose or gain and still be able to reach their goals.

Risk capacity is closely related to risk tolerance, but it’s a difference of emotional decision-making versus fact-based decision-making. Whereas risk tolerance is a measure of your client’s emotional capacity for risk—which is inherently tied to their retirement goals and life circumstances—risk capacity is rooted in numbers. It aims to measure how much risk a client needs to take in order to generate the returns that will help them reach their financial goals.

Risk capacity can even shape risk tolerance by illustrating to your clients the kind of risks they need to be willing to take if they want to reach all of their goals in retirement.

3. What is your risk perception?

Risk perception is a view of how risky the current path is. People don’t experience risk, per se; they experience events. For this reason, they need to know how likely they are to encounter extreme market events, such as economic recessions and bubble markets, and understand what they are at risk to lose.

A heavy-tail risk calculation model will give you the most accurate insight. (Our SmartRisk tool uses a heavy-tail model. You can get a free trial here.) By using these modeling tools to account for many possible future scenarios, you can help your clients choose a risk profile and retirement strategy that positions them for financial freedom in spite of unforeseen challenges.

When planning a client's retirement investment strategy, break down your client conversations into easy-to-understand questions that will help them understand their retirement goals and needs and select a strategy that serves those ambitions. Through this step-by-step approach, they will gain a clear picture of the risks associated with their plan and develop greater confidence in you as their advisor.