Here’s the risk tolerance we ought to be talking about

Rain window

I was a little hard on people who have a low investment risk tolerance. But that’s not because I’m a mean person. I have very good reasons.

I get that the idea generally is that we want to protect against people who end up taking on more risk than they can “handle” and then “panic sell” (or “panic buy”).

But that seems backwards. The solution here isn’t to cater to the low risk tolerance, the solution here is to become more comfortable with the risk tolerance you need. Because I’ve already shown that it is impossible to save enough money for retirement with just an income and no investment vehicle.

Frankly, I think we’re talking about risk tolerance all wrong. We’re focusing on the wrong kind of risk.

What other risk is there?

When we talk about risk tolerance, we’re always talking about how comfortable you are with the swings in the market. And the swings can be big indeed. At the time of writing, we’ve been dealing with some rather heavy volatility these days. And unless you’re very young, you probably remember what a massacre 2008-2009 was for the markets.

Forget all that.

Retirement is an emergency-level situation that requires your attention right now. And yet, many people don’t give the situation the urgency that it requires.

Why is that? I believe it’s because people have a high risk tolerance for uncertainty in retirement.

It’s hard to think of any other explanation. Yes, you can say that many people just have overwhelm on this topic, which causes them to not do anything. And that would be true, but the overwhelm is masking that on some level, you are tolerant of the risks of doing nothing (or not enough) for retirement.

This is the risk tolerance that we should be concerned with. The fact that people seem to be okay with just “seeing what happens”. Whether it’s “Social Security will get me through” (it probably won’t), or “I’ll just go on Medicare/Medicaid” (that won’t help much), or “I can live on my partner’s retirement” (are you sure?), people seem to be incredibly risk tolerant.

Sample emergency

Let’s say that you’re a couple, both around 55 years old, who have worked all their lives, but only have $100,000 in the bank to show for it.

That is an emergency, plain and simple.

Failure to make an emergency plan to figure this out (and it can be figured out) is to, in effect, have a high risk tolerance for retirement. A sky-high risk tolerance.

Think about it. What are these people going to do when retirement hits, and they have no pension, $150,000 in the bank, and just Social Security to rely on?

With an average Social Security payout of $1,400, these folks would only have about $500 additional to pull from their mini-nest egg, unless they want to deplete it all quickly.

You see how risky all this is?

The unspoken risk

Why aren’t we talking about this risk? Why do we coddle people who are “scared” of market volatility? We need to be saying to them, “You think you’re scared now? Wait until you’re at retirement and have no money!

Personally, I’m pretty risk-averse. I don’t buy individual stocks, and I have a probably more money saved in my emergency fund than I need.

But another way that I’m risk-averse is that I treat saving for retirement like the emergency situation that it is. I’ve been planning for it in some form or another for years now, and I’ve still got decades of working life left in me. I just wish more people were as risk-averse as me.

But enough about me. What is your risk tolerance toward saving for retirement?

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