Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Why Risk Tolerance Doesn't Matter (Use THIS Instead)

• Ari Taublieb, CFP®, MBA • Episode 295

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Most advisors start with one question: “What’s your risk tolerance?”
In retirement, that question might steer you in the wrong direction.

In today’s episode, Ari breaks down why traditional risk questionnaires fail, and the better framework that actually protects your lifestyle, your confidence, and the income you need to live well in retirement. 

You’ll hear the story of a couple who rated their risk tolerance completely differently… and then changed their answers the moment markets dropped. That moment revealed the real problem: risk tolerance isn’t stable, and it doesn’t tell you what you truly need to know.

Instead, Ari walks through a practical, back-of-the-napkin method for building a portfolio that fits your actual life, not a textbook. From identifying how much income you really need… to understanding how many years of “war chest” money can help you ride out downturns… to adjusting your allocation as your lifestyle shifts from go-go years to slower seasons. 

If you’ve ever wondered whether your portfolio is too risky, too conservative, or simply too cookie-cutter, this episode will give you the clarity you’ve been missing.

In this episode:

• Why risk tolerance changes with the market — and why that’s a problem.
• The question to ask instead of “What’s your risk tolerance?”
• How to determine the right mix of equities, bonds, and cash for your lifestyle.
• Why retirement is a different game — and why singles, doubles, and consistency beat home runs.
• A simple framework to help you optimize without overthinking.

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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.

The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements

Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.

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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.


SPEAKER_00:

If your advisor has ever asked you, what's your risk tolerance? I would view that as a pink flag. Not a red flag, but a pink flag. And let me explain why. Here's a story to illustrate this. So I was once speaking to a couple, and this was when I was an advisor in my early years, and they had said, Hey, I really enjoyed today's meeting, but you honestly forgot to ask us something. And I said, I'm sorry, what was it? They said, you didn't ask us our risk tolerance. And I said, Oh, there's a reason for that. They said, Well, that makes me uncomfortable because that's a common question. I feel like you should be asking me. And I said, I appreciate the transparency. I would like to ask it now. And they go, okay. And I said, What's your risk tolerance? And they said, Well, I'm like an eight out of ten. I went, okay, spouse, what about you? They go, I'm a two out of ten. I said, okay, guys, what if markets change drastically? What's your risk tolerance now? Primary spouse, obviously not saying their name. They said, Well, if markets go down, then I'm about like a four. And then I said, Okay, what about you, spouse? If markets are down 40%, what's your risk tolerance? And they're like, I'm a negative 1,000. I don't want markets to ever go down. And I said, You see why I don't think that's the most effective question? Your risk tolerance is going to change based off how markets are doing. It's not an effective gauge. I want to make sure you have enough money to never run out, and I want to make sure that you don't die with too much money. And the way we do that is by having a conversation about how much income do you need in retirement. So I prefer asking questions around how much money would make you uncomfortable in terms of you're going to lose sleep. If your portfolio went from a million to$800,000, how would that make you feel? And certain people, like yourself perhaps, would say, well, that would really bother me because I no longer have income from when I was working and I feel like I don't have time to make up those gains and I don't want to underspend in the years I really want to enjoy my retirement, which would be a great response. Maybe another spouse would say, Well, you know, I don't love that idea, but if we're going to live the next 30 years and you're telling me our best chance to die with$10 million is to take on as much volatility as humanly possible, well, then I would want to consider that. I'd say, great, well, let's have a deeper conversation as a couple to make sure that we're making sure both of you are sleeping at night. Because if you're not sleeping at night, it defeats the whole purpose of a plan. You have to have a plan you agree with. But there's something I prefer rather than risk tolerance, and that's making sure you don't have a cookie cutter allocation. Now I've shared this in the past, but one of the coolest gifts I ever received is an anti-cookie cutter jar. Literally a jar that someone gave me just to illustrate how they used to think about risk tolerance, and now they think about how do I make sure my portfolio is not cookie cutter. So I'm going to give you a framework in today's episode that's hopefully going to help you think about making sure you don't have a cookie cutter portfolio. And this is something really easy that I've seen other firms do where they'll say, Yeah, okay, what's your age? What's your risk tolerance on a scale of one to ten? Okay, you're a four, you're a three, okay, yeah, yeah, yeah. Yeah, here's your portfolio. Have a good day. You're like, hey, do you even know me? Like, that's the equivalent of going to the doctor, having them say, okay, fill out this form. You fill it out. Yeah, in previous medical history, had a surgery once when I was nine, okay, and they go, yep, you broke your leg, you need surgery. It's like, hey, maybe we should try physical therapy first or like less invasive things. Not that I'm anti-surgery. I've had surgeries and I'm a soccer player and I'm grateful because if not, I couldn't play soccer. But I didn't start with surgery, and so it's not a perfect analogy, but you get my point here. So when it comes to having a cookie cutter portfolio, well, look, would you be okay with a cookie cutter portfolio? Yeah, you might be okay. Do you need to do exactly what I'm going to explain here? No. But I don't think any of you need to listen to any financial content. I bet you've got a good head on your shoulders. You understand I should save more and invest more than I spend. Great, that's getting you to retirement. But if you want to optimize your retirement, now it's a different game. It's not about saving money. It's now how do we optimize and keep what we've had, you know, grow for us effectively in a way that, yes, it grows for us, but it doesn't put us at risk of potentially a bad year making us have to go back to work or have to potentially spend way less than we would like. So it's just a different game now. I'll explain it sometimes to clients. Like if you're trying to hit a home run but you're in your working years, it's not the end of the world because you're going to get more pitches. And I'm not even a baseball guy. But if you're in retirement trying to hit home runs and you strike out, that's a problem. You don't have more pitches coming. You need consistent singles and doubles. So the framework that I'm going to go through today hopefully will release some anxiety you might be thinking about do I have the right portfolio and help you build the one that you're thinking of. As a reminder, my name is Ari Talbleb, I'm a certified financial planner, host of the Early Retirement Podcast, and chief growth officer here at Root Financial. If you're looking to optimize your finances because you work too hard not to, head to our website, rootfinancial.com, click the little button that says see if you're a fit, answer a few questions, and you can get started talking to an advisor. Now, here's the framework for today's video. Rather than me asking you what's your risk tolerance and seeing how you feel about it, because that will change, I recommend understanding how much income you need. And once again, I bring emotions back into it. I don't just stick with the finances. Let me show you. And I'm going to do this without preparing anything. You guys can see and hear me, obviously. I am just explaining this, and this is just off the top of my head. So I'm going to give you an example so you can see how I think about it.

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Thank you.

SPEAKER_00:

Sometimes I'll build out a super fancy case study. I love getting the host. Sometimes I just show it's more authentic. So we've got to be able to do that. And let's say you want to spend$100,000. Okay. You probably want to retire later and you're wondering well, you're kind of$62 or$63 in my head. But if I could go earlier, I would have to do that. So in this case, you want to spend$100,000. Now that's$100,000 every year. Adjusted for inflation. And that's after educational. And you're probably going to want to spend only because in the early years clean your trips you've got. You've got a kid in college or a wedding comparison podcast. There's one-off stuff just for simplicity here, but let's keep it at$100,000. Let's assume that you have a million dollars in your portfolio. I respond to every single end in a full time. All of it's in a Rothbard. Most of it makes it a lot of people. Most of it is in a 401 IRS brokerage account, which I call a superdig account. Let's assume you've got a million just in a Roth, just so it's all after tax, just keeps our math easier here. And you're like, I want to have an optimal allocation. Well, that's different from what maybe conventional logic would say. Because if conventional logic, if you were to look up an article, it says, how much should I have in bonds? Sometimes it'll say, well, take a hundred and subtract your age. So a hundred minus your age is 60, 40% in bonds. Okay, well, let's just play that out for a second. You want to spend$100,000 every single year, right? Okay, 100 every year, that would mean, let's just assume that, you know, you've got a million bucks, 100 times 4 would be 4 years of expenses. That would mean$400,000 would be in theoretical assets that you could pull from if you needed. I call these war chest assets, meaning when markets are doing well, awesome. But when they're not, you got to pull from something. So these are bonds, inflation protected securities, cash, money market alternatives, CDs. So now if we're using 6040 logic, 60% or 600,000 is in equities and stocks, 400% is in fixed income, aka bonds, cash, et cetera. So that's what you would have if you had a cookie cutter portfolio. Is that optimal? I would say probably not. And here's why. Well, if you have a 60-40 portfolio, once again, that would tell me that you have four years of living expenses. Now, maybe there's truly no other income, but you're probably gonna have Social Security, and that's probably gonna start. Let's assume in this case you want to start at full retirement age. So that'd be 66 in 10 months or 67 based off your age. So let's assume that starts in seven years. Okay, so in seven years, we're going to have more income coming in. So let's not worry about it, but we got to make sure we're aware of it. I'm gonna bring it back into the picture here, not to confuse you, but just think about this a little bit because it's important. So now let's say you want$100,000 a year and you live that first year of retirement, and you're like, wow, turns out we're not really bothered by markets that go up and down. And I know we said we want to spend$100,000, but honestly, we're totally fine spending$60,000. So let's just pretend you've decided$60,000 is how much you want to spend. You shifted, you changed your mind. Most people would still have$60,000. That's their portfolio. But the reason you should be dynamic is you would be, in this case, unnecessarily conservative. Once again, I don't want you to run out of money, but if we were to look at the logic here of a 60-40 portfolio, let's assume your portfolio is grown. Let's assume your 1 million has become 1.2. Okay, so 1.2, see I've just got my normal calculator on my iPhone, nothing fancy here. You have 1.2. Well, if you wanted to have four years of living expenses, which by the way, I prefer to have five years. So the average market downturn is two and a half years. So in terms of making your money back, not that you made a profit, but when markets went south, because they're going to go south when you retire, most people worry, oh my God, am I going to be okay? You're going to be okay if you have enough to weather downturns. If everything's growing for you and you're trying to pull income, you might have to sell at a loss, which is what we're trying to avoid. So let's pretend$60,000 a year, that's what you need. That's$240,000. That would be four years' worth. Well, if we were to take$240,000 and divide that by your new portfolio,$1.2 million, that's 20%. That tells me that you're off. It's not optimal. What should your portfolio be? If you wanted four years of living expenses, it should be 80% equities, 20% fixed income. You need 20% or$240,000. But if you were to stick with a 60-40 portfolio, just because that's what people say to do, you would have, if we were to take 40% of$1.2 million, you would have$480,000. So that's$240,000 unnecessary dollars growing for you at a much slower rate than they otherwise could have, which means that's your money losing out to purchasing power, that's less security when it comes to long-term care, and just less overall growth in, in my opinion, an unnecessary way. So let's assume we wanted to optimize and let's go back to the$100,000 example. You're like, nope,$60,000 was okay, but we really love spending$100,000. Now we're 67 and we're want to spend more. We're less worried. We don't have to deal with healthcare before Medicare anymore. You know, we're just we're balling, we're loving life, okay? If you're spending$100,000 every year and your portfolio, let's say at this point has grown to one and a half million dollars, I generally like to have five years of living expenses. In in it's just me being extra conservative, so you never have to worry if markets go down, what's gonna happen? So what's a hundred thousand times five? That's five hundred thousand. So five hundred thousand, that's what I want, right? But wait a second, remember that social security thing I was talking about? Well, let's let's say social security is helping out, and social security brings in forty thousand a year. Do we still need five hundred thousand? No, we don't. Why? If a hundred thousand is what we want, and forty is coming in from social security, that means sixty is all we need from our portfolio so that we can still spend a hundred. So that means instead of needing five hundred thousand, we need two hundred and forty thousand. Forty thousand is already coming from Social Security. We need sixty thousand times four years, that's two hundred and forty thousand that we would need if we wanted to have that same five years of quasi-safe money. But this is only four years, so we've got to increase that from two forty to three hundred thousand. So now let's take three hundred thousand. Reminder, three hundred thousand is five years of expenses, allowing you to spend a hundred thousand a year because Social Security is providing the other 40,000. Now, this 300,000, we've got to divide that by our new portfolio value, which is one and a half million, which is 20%. So what the heck did we just learn today? Did we learn anything? Hopefully, what you learned is not to have a cookie cutter allocation, to be willing to change that over time, because I'm now recommending a potential 80% equity and 20% fixed income allocation. But pretend you didn't turn on social security. Would I recommend that? No, no, no, no, no, no, no. Why? That's way too aggressive. I can't have that amount in equities. If I need you to create income, I would need to increase that because Social Security is not coming in. What if there's inheritance? What if there's a pension? You need to shift your asset allocation. Well, you don't need to, but I'd recommend strongly considering it because it means you're gonna have more dollars growing for you outpacing inflation. This is just one example of why I don't like the risk tolerance question, because if I started with what's your risk tolerance and you told me you were a four and someone else told me they were a three, I might go, got it. Let's put you in a 50-50 portfolio. And it would just quite honestly not be in your best interest because you could have either weighed you could have made, not weighed, that's not a word, you could have made way more money. At the same time, sometimes I'll protect someone based off their answer. For example, if you would come to me and you're like, yeah, you know, my risk tolerance is like an eight out of ten. Like I just I'm not bothered by volatility and I understand how markets work. I'd say, great, I do too, but I want to make sure you don't run out of money. So in this case, if someone said, you know, I've got a million bucks and markets don't bother me at all, maybe they want to be 90% equities. Maybe that's what they've been the last 30, 40 years, maybe that's you. But in retirement, if you had 90% equities, that's$900,000 out of a million that's growing for you, which is good, but that means there's only 10% in fixed income or cash, which means if markets don't do well and you want to spend a little bit more, well, now we might have to sell something at a loss if the equities aren't doing well. And that's what I'm trying to protect against. So I urge you, don't have an advisor that just says, what's your risk tolerance? You circle between one and ten, where you feel. It's kind of like when you go to the bathroom and they're like, how is your service? And it's like a big smiley face and like a little smiley face, and like a frown face, then like a very crying face. That's not that helpful. Like I I would rather ask for feedback. Now, when I leave the bathroom, the last thing I'm thinking about is, okay, you know, how can I improve the amenities here? So that was a bad example, but you guys get my point here. How can we be really effective so that we make the best financial decisions? That one bathroom experience does not compare to what your asset allocation should be and how you should be set up so that your portfolio is optimizing what you work so hard to create. So that's it for this episode. A little bit of a longer one, but obviously I love this stuff. So if you guys are equally in love with this stuff, please like this, please share it with friends. It helps it grow, and that's my goal is to help as many people as possible, have confidence. And then finally, please, if you want help with this, is what we love to do. Reach out to us at rootfinancial.com, a little button that says see if you're a fit in the upper right, and then we might be talking very soon. Thanks, guys. Thank you all, as always, for listening to the early retirement podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years, and that is because I love getting to do this. Now, please be smart about this before you actually execute any strategy that you see me talk about or hear me talk about, should I say, please talk to your financial advisor, your tax preparer, your estate attorney. Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here, guys. Please be smart about this. Appreciate you listening as always. And you can, of course, submit a question on my website, early retirementpodcast.com. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person. And if I find it will be helpful for a lot of people, I will absolutely make an episode on it. At the very least, give you some insight. That's it. Thanks, guys.