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Matching Risk to Your Retirement Timeline

Feb 12, 2016 12:30:00 PM
Author: Scott Hanson

Scott and Pat help Greg evaluate his risk tolerance as he nears retirement, taking into consideration his Thrift Savings Plan (TSP), mortgage, and fixed income sources.

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Scott Hanson: Greg, you're with Hanson McClain.

Greg: Hi.

Scott Hanson: How you doing, Greg?

Greg: Doing well, thank you. Well, I have a question and I'm with the Federal government. I have approximately six to eight years left. I'm anticipating with working.

Scott Hanson: Okay.

Greg: I have a three-tier retirement possibility at this time, which is Social Security, Federal government retirement, my Thrift Savings Program.

Scott Hanson: Okay.

Greg: Currently and for a long period of time, I've contributed the maximum amount that the IRS will allow, and that includes receiving a 5% matching.

Pat McClain: Okay. And it's in the Thrift Savings Plan, correct?

Greg: Yes, sir.

Pat McClain: All right, perfect.

Greg: So what I'm asking is because I'm getting closer anticipating six to eight years left in employment, I have continuously, as long as things are going along fairly good, contributed and put my money into the high volatile area of the Thrift Savings Plan which follows the S&P 500 and the Dow.

Scott Hanson: Got it.

Greg: Now, what I'm looking at, and I'm comfortable with it, I know that the options or what my threshold, I guess, for loss and gains and the risk. With this little bit left and going to the end of my career, is this still continuing to be a good option, or how would you suggest at this point?

Pat McClain: Got it. There's a couple of things, right? The first thing is how much money is in that Thrift Savings Plan?

Greg: Between 300 and 400.

Scott Hanson: Okay. So it'll be a nice supplement to your pension and Social Security.

Pat McClain: And have you figured out how much money that the Social Security, your government pension and, let's say, a 4% or 5% distribution on this will be? Will that satisfy your income needs?

Greg: It should be fairly solvent and make me okay.

Pat McClain: Before we answer your question, I'm gonna direct you to a webinar that I did on MoneyMatters.com called "The 7 Personal Decision Points." And the first personal decision point is, "How much money do I need to retire?" The second is, "Is there debt I can get rid of when my expenses change in retirement?" That'll really help you figure out. That's number one and two.

I'll go right to number seven which is the seventh personal decision point is...Number one was, "How much money do I need?" Number seven answers the question, which is, "What are the sources of income. Where are they coming from?" Number one and number seven are gonna match each other. So it takes about 15, 16 minutes. Go to our website, MoneyMatters.com, watch the seven personal decision points. Now, your question has to do with risk and risk tolerance.

Scott Hanson: Let me ask you this, Greg. When you retire, are you planning on taking income from your Thrift Savings Plan?

Greg: I'm actually anticipating taking a portion of it.

Scott Hanson: Okay.

Greg: I haven't made the decision though even though the low percentage for financial handling is minimum with the Federal government, or if I roll it over into a Thrift Savings Program.

Scott Hanson: Okay. Yeah. Let's assume we all operated with no emotions, and we're all purely intellectual all the time, and we all had a long-term focus. One can certainly make the argument that you're fine having this being 100% in stocks because you've got the majority of your assets really are in fixed income, your pension, and Social Security. So you already have a big chunk of your retirement income in guaranteed sources. So one could certainly make an argument and say, "Hey, if we look at this from a big picture standpoint, Greg already has a good chunk of his money in fixed income that is guaranteed retirement income. And this is a supplement, so therefore we can take additional risk."

Now, the fact is we all operate as humans. Let's assume that you're about to retire, and we had another financial crisis, and that the $300,000 or $400,000 you have saved in your Thrift Savings Plan declines by 55%. Would you postpone retirement?

Greg: Probably, that would be something I would have to look at, very possible.

Pat McClain: Okay. So what that tells us is that you should probably pull back a little bit. Let me ask one other question before we completely answer your question, which is, how much do you owe on your home?

Greg: Approximately $85,000.

Pat McClain: And will it be paid off by the time you retire?

Greg: I would hope so.

Scott Hanson: Okay. I would pay off that home by the time you retire. So if you've got the home paid off in retirement, you've got a pension, you've got Social Security. You've got three great things going for you which says, "I can take more risk in my 401(k)." And in saying that, then maybe...

Greg: I don't think I'd live next door.

Pat McClain: I don't think I'd be 100% equities in the 401k. I don't think I would either. I'd probably, in your situation...I don't know you that well. In our office, we'd actually bring you through a risk tolerance that we can judge what your risk tolerance is. And then, you probably don't want any more than even 70%. Seventy percent is probably enough. So I would pull it back to 70%, and then I'd re-amortize that mortgage over the next six years which means I'd make payments on it so it's actually paid off.

Scott Hanson: Even if you had it slightly reduce when you're going in your 401(k).

Pat McClain: That is correct. That is correct. So I'd prepare for retirement in six years. If you go to our website, again, MoneyMatters.com, go through that seven personal decision points. You'll understand it, and it will help you actually make that decision. But if you were in my office, I'd lower that risk probably to 70% and I'd re-amortize that mortgage to have it paid off in six years.

Scott Hanson: It sounds like you're on the right track already though, Greg. We'll wish you the best of success going through this. It sounds like you actually have some risk tolerance as well, but every situation is unique, and that's why that 7 Personal Decision Points webinar on our website is helpful. Again, at MoneyMatters.com.