Episode 112: Types of Financial Risk to Watch Out For

Today’s Prep:

What risks might you encounter when it comes to your finances? How prepared are you for what may come? Find out more about the different types of risk and how to account for them in planning.

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Equipping Points:

What kind of risks are you prone to find in your financial plan? Is there any way you can avoid it? On today’s podcast, David talks through several different kinds of financial risk so that you can prepare for it accordingly.

One of the most obvious forms of financial risk is market risk. When the stock market goes up, you’re likely to feel good about your risk level. It’s when your account goes down that you start to hate risk. The stock market goes down a certain percentage every year, but when you see it drop, your emotions may want to cause you to make a rash decision. Instead, if you view it as normal, you won’t have the same emotional response. Are your expectations set accordingly?

What is interest rate risk? Right now, we keep hearing about how low interest rates are. So, what’s the risk? If interest rates change on your bonds, how will the value change based on your duration? Make sure the bonds you have in your portfolio don’t have a bunch of interest rate risk. How does this impact your mortgage rate or bank savings rates?

Are you accounting for inflation risk in your retirement plan? Prices will likely change on things like milk and bread over time, but at a faster rate is the rising cost of healthcare and long-term care costs. On the other hand, retirement income such as a pension or even Social Security are fairly fixed amounts. If you do have a pension, should you take the monthly amount or a lump-sum?

It’s no secret that tax rates are at a historic low, which means it is likely they will go up in the future. What kind of tax rate risk should you be aware of? What happens to your tax rate if you or your spouse were to die? How might a Roth conversion help reduce your tax rate risk?

When’s the best time to consider risk? It’s best to focus on it before something happens. Have you analyzed the risk within your financial plan lately?

[0:30] – Is David a risk-taker?

[1:59] – What are the different types of risk in finances?

[3:16] – Market risk

[7:47] – Interest rate risk

[12:10] – Inflation risk

[16:14] – Tax rate risk

[22:40] – Longevity risk

Today’s Takeaway:

A little bit of preparation will go a long way for helping you understand your emotions the next time the market loses 10 percent.”

– David Dickens

Additional Resources:

PODCAST: The Story Behind GameStop StockPODCAST: 5 Important Retirement Statistics

PODCAST: Roth Conversions, Portfolio Diversification And Pension Lump Decisions?

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The host: David Dickens

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