Written by: Brian McKinney, CFP®
When life throws unexpected curveballs, it's important to take a step back and evaluate your financial situation to ensure you're still on track to reach your long-term goals. Throughout the years and countless discussions around our client’s visions and reviewing their portfolios, I've witnessed firsthand the importance of re-evaluating clients’ risk levels based on their life events and financial goals. This is a staple conversation in our planning process and a value add to client’s lives, because when your financial goals and situation change, your investment plan must accommodate.
So, when is a good time to re-evaluate the risk being taken within your portfolio?
First, let's keep in mind the different stages of wealth: asset accumulation and asset decumulation. Asset accumulation is the process of steadily building up a portfolio of assets over time through regular savings, prudent investment decisions, and effective management of risk. I personally define the ultimate goal of asset accumulation as the ability to grow one's wealth and financial security over time, with the aim of achieving important long-term financial goals such as retirement, education funding, and legacy planning.
On the other hand, asset decumulation refers to the process of gradually drawing down and spending one's accumulated assets in retirement or other stages of life when one's income is reduced or no longer exists. This can involve the sale of investments, withdrawal of retirement savings, or other strategies to generate income from one's assets while minimizing risk and preserving capital. Effective asset decumulation planning is crucial for ensuring a stable and sustainable retirement income stream, as well as for protecting against the risks of market volatility, inflation, and unexpected expenses.
Through the different stages of your journey, certain life events may have an impact on which phase of wealth you're in and therefore may require a re-evaluation of your risk level. For example:
- Change or loss of job/career: If you've experienced a major change in your career, it's important to re-evaluate your 401(k) or employer plans to ensure they still meet your current needs in respect to what you envision for these accounts. It is almost important to review the risk in your personal accounts as well, such as any IRAs, Roth IRAs, or brokerage accounts. Additionally, if your income has changed drastically, it may be appropriate to maintain the current investment strategy but adjust the contributions to the portfolio accordingly.
- Buying or selling a business or home: Buying or selling a business or home can have a significant impact on someone’s situation and may require a reassessment of their investment portfolio. For example, selling a business or home can potentially provide a large infusion of cash that may need to be invested to achieve financial goals. This could require adjusting the risk profile of the portfolio to ensure that it remains aligned with your financial goals. Similarly, buying a business or home can result in increased debt and reduced cash flow, which may require a more conservative investment approach.
- Unexpected health event & larger expenses: This one I can speak on firsthand, since I saw it on a day-to-day basis when my mother had her stroke over two decades ago. I watched my family go from a dual-income house to a single-income household overnight, unexpectedly. These types of events can result in a reduced ability to make contributions to the portfolio or even the need to potentially withdraw funds to cover expenses. In such situations, it may be necessary to adjust the risk profile of the portfolio to ensure that it remains aligned with one’s objectives and risk tolerance.
- Inheritance: Inheriting a large sum of money can provide an opportunity to increase investments or pay off debts, but it can also result in a need to adjust the risk profile of the portfolio to ensure that it remains aligned with your financial goals and risk tolerance. Depending on the size of the inheritance, it may be appropriate to consider more aggressive or growth-oriented investments, or conversely, more conservative investments that prioritize capital preservation depending on where you are in your financial life. Additionally, legacy planning may become a consideration which would require planning past your own lifetime. This may include considerations such as philanthropic giving, establishing trusts, or creating a lasting legacy for future generations. By engaging in legacy planning, you can ensure that their inheritance is used in a way that maximizes its impact and aligns with their values, while also supporting your own financial goals.
- Retirement: Retirement typically requires a shift in the risk profile of one's investment portfolio, as the focus shifts from accumulation to income generation and capital preservation, or as we discussed before, asset decumulation. Comprehensive financial planning is a crucial step in determining the optimal risk level during this phase of wealth, as it considers your unique financial circumstances, goals, and risk tolerance, and can help ensure that you are well-positioned to stay on track financially.
Life is unpredictable, and it's important to regularly keep a pulse on your portfolio’s risk level. If any of the life moments mentioned are relevant to your individual situation, it may be time to gauge your investment portfolio’s risk in relation to those goals.
Through a "planning first” approach to wealth management, a calculated review of risk has proved to help investors navigate these scenarios and make educated financial decisions. The first step may be as simple as taking inventory of your financial life to see if any necessary adjustments need to be made. After all, life comes at us fast, and if we don’t pause to check-up on what’s under the hood, we may have missed out on an opportunity to optimize our situation.