When you are thinking about investing, do you consider risk? And, if you do, how do you assess your tolerance and capacity for losing money, especially if you are retired?

Risk tolerance is “the level of risk an investor is willing to take” -- as good a definition as any. This one is cited in “How to Determine Your Risk Tolerance Level” (tinyurl.com/3rh8j55x), posted in the Intelligent Portfolios section of the website for Charles Schwab, a multinational financial services company.

Risk of loss is measured behaviorally against possible gains. People are usually biased to avoid losses (“loss aversion”), that is “the fear of loss can play a bigger role in decision-making than the anticipation of gains.”

Risk capacity is something very different. Capacity is all about how much you can afford to lose. For example, when moving from a working career into retirement, the transitionary period is by far the most risky for anyone. Retiring at a market top is the worst time to begin a program of monthly withdrawals to pay for living expenses.

While a retirement timeline can last decades, be careful about advice that suggests you can take on more risk when your time horizon is long. The investment period of time is long, but the waiting period is not. That is, most people have to create a way to generate portfolio withdrawals over the decades of retirement. Risk has to be understood in those terms.

Contrast a young investor who is saving for retirement. The desired outcome is a large nest egg 30 or 40 years into the future. In that case, a long time frame until the savings and investment program matures can support a higher level of risk over that period of time -- as long as the risk is reduced as one transitions into retirement. As I said, you don’t want to be hit with a downturn when you need your portfolio to shift into cash flow production after you leave your job.

In any event, trying to quantify risk tolerance is hardly easy for individuals to tackle on their own.

“Individual investors may also require an assessment of their intellectual and emotional tolerance for potential losses associated with risks; for these assessments, interviews or questionnaires can be used,” according to a 2010 position paper on investment policy statements (tinyurl.com/5yvu5bay) for CFA Institute, a global association of investment professionals.

If you want to try a self-assessment of your own, the University of Missouri (tinyurl.com/duaj25fc) offers one online that asks more than 20 questions and gives you a score that is linked to its interpretation of your risk tolerance.

Another option is Schwab’s Intelligent Portfolios (tinyurl.com/3a8x6wja). The robo-adviser asks 12 questions to get an assessment of not only the type of investments you want to make (including your goals and timeline), but what type of risk you are willing (or not willing) to take. You can do the assessment without opening an account with Schwab. (By the way, I have no connection with Schwab.)

Whatever assessment a do-it-yourself investor may use, a client of a portfolio manager will likely follow a different path. For example, my personal experience running retirement portfolios calls for setting portfolio risk parameters in conjunction with the client instead of asking for a self-assessment. An acceptable risk level is built around desired long-term and short-term outcomes and the demands placed on the portfolio (cash flow requirements now and projected into the future), all in the context of financial market expectations. This method takes both risk capacity and risk tolerance into account.

How a financial firm determines risk tolerance for you is an important conversation to have before transitioning into retirement. My experience tells me that the most successful portfolios flow from an assessment of risk first, reward second.

On another matter, the deadline to apply for the 401(k) Champion Award, which shines a light on 401(k) participants who make good 401(k) decisions, has been extended to Oct. 28. To compete for the award, go to 401kchampion.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

While the concept of a “trusted contact person” has been around since 2018, regulators are currently encouraging brokerage firms to ask you to name yours. The goal? To provide you with “additional protection.” This is what you need to know.

“Trusted contact” is a term used in FINRA’s customer account information rule (rule 4512(a)(1)(F), which you can view here: tinyurl.com/uy66acjk). FINRA, the Financial Industry Regulatory Authority, regulates the brokerage industry.

Under the rule, when you open an account (or update it), the brokerage firms must ask you for the name of a trusted contact. You have the option of saying yes or no.

The goal is to give authority to the firm to talk with someone about your account in case of a problem -- perhaps the brokerage firm lost contact with you due to a natural disaster, or there is concern about potential fraud.

Because brokerage firm policies can differ, read your firm’s brokerage agreement to see when it will share information with the trusted contact.

In this example, you authorize the firm to reach out to your trusted contact:

“If there are questions or concerns about [your] whereabouts or health status;”

“If [the firm] suspects that [you] may be a victim of fraud or financial exploitation;”

“If [the firm] suspects that [you] might no longer be able to handle [your] financial affairs;”

“To confirm the identity of any legal guardian, executor, trustee, authorized trader, or holder of a power of attorney;”

“If [the firm] has any other concerns or is unable to contact [you] about [your] account(s) held at [the firm].” (Also see this Securities and Exchange Commission’s Investor Bulletin at tinyurl.com/8yb4f42r.)

You would be giving authority to the firm to judge when these circumstances arise.

What information might the brokerage firm share with your trusted contact?

Again, read your brokerage agreement.

In this example, the firm can share “nonpublic personal information.” That includes “financial account information and balances, recommendation for purchase of a security or insurance product, and ... personally identifiable financial information (i) provided by a consumer to a financial institution; (ii) resulting from any transaction with the consumer or any service performed for the consumer; or (iii) otherwise obtained by the financial institution.”

Why would the firm do this? “To address possible financial exploitation; to confirm the specifics of [your] current contact information or health status or the identity of any legal guardian, executor, trustee, or holder of a power of attorney; or as otherwise permitted by FINRA rules.”

Well enough. What happens next? Are there limits on the authority of a trusted contact?

Indeed, there are. The person “cannot make trades in the investor’s account; cannot make decisions about the investor’s account; and does not become a power of attorney, legal guardian, trustee or executor by virtue of being identified as a trusted contact,” according to a joint release (tinyurl.com/pkhse8k8) issued by FINRA and the North American Securities Administrators Association (NASAA).

One more thing: When you provide a trusted contact, you may also be agreeing to indemnify the firm if something goes wrong. Here is an example: You indemnify the firm “from and against any and all claims, judgments, taxes, fines, penalties, damages, liabilities, costs, and expenses” related to “any claim, judgment, or proceeding arising out of or relating to [the firm] contacting, or failing to contact,” the trusted contact.

What can go wrong? I can only guess. What can go right? Potentially preventing fraud.

The concept of protecting a customer is laudable. How well this works will depend on the circumstances, including the brokerage firm’s protocols after engaging with the trusted contact. If you have any experiences you want to share with my readers, write to me at readers@juliejason.com.

For more information on the subject go to finra.org/trustedcontact, which includes an explanatory video.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Sometimes it’s nice to do something on the spur of the moment and leave structure and planning behind. Spontaneity is a good trait to have in your life -- but not when it comes to funding your retirement years.

That’s one of the conclusions reached by the Franklin Templeton RISE (Retirement Income Strategies and Expectations) Survey (tinyurl.com/thwxju9s) of 2,004 adults. The survey, in its 10th year, “explores attitudes and concerns about preparing for and living in retirement.” Franklin Templeton is a global investment firm.

One section of the survey dealt with those who were retired and their plans for how they would spend their nest eggs. A third of those questioned said, “I’m spending what I need each year and hoping it will last.” That’s definitely living in the moment.

Another 41% said they were trying to limit their spending “to sources of income and not to dip into ... savings.” A much better approach.

Pre-retirees (ages 55 to 64) expressed concern about their futures, with 58% saying they were behind on their saving for retirement. Sixty-three percent did not have a strategy for generating income for 30 years -- the possible length of their retirement.

When retirees were asked about what they would have done differently, 48% admitted they should have saved more.

Sooner or later, hopefully, you will be able to retire secure in the knowledge that you have saved enough to maintain your lifestyle for the rest of your life -- and perhaps to leave a legacy for children and/or charity.

As regular readers can guess, I’m a fan of knowing your numbers. Specifically, your household cash flow -- dollars earned vs. dollars spent. The difference between the two numbers (inflow vs. outflow) defines the retirement income gap.

More specifically, how much money is inflow from “guaranteed” sources (Social Security and pensions) versus what money you have going out. Naturally, the ideal situation has your income exceeding your outflow, after taxes and inflation. (Keep in mind that even if you are blessed to have a pension, it may not increase with inflation.)

When it comes to analyzing your spending, divide expenses into essentials (mortgage, utilities, etc.) and nonessentials (vacations, gifts, etc.), with the idea that you control when to spend for discretionary items -- you can delay vacations until you have funds to pay for them, for instance.

Next, you need to make sure you have a solid understanding of your investments. Will your investments (or annuities) create enough cash flow to fill the retirement income gap?

If not, you’ll need the answers to two questions:

1) “How much capital do I need to liquidate to cover the retirement income gap each year, after inflation and taxes?”

2) “How long will my capital last?”

Your financial adviser will address those questions with you. To do some of your own calculations, you can use a free retirement calculator (tinyurl.com/3e3wxvxs) provided by FINRA, the Financial Industry Regulatory Authority, which regulates the brokerage industry. By doing these calculations and running a number of scenarios, you can get a better understanding of your current financial preparation for retirement.

The point is to be prepared for the decisions that need to be made, including saving and investing more money now (if possible).

A 2021 Global Retirement Index survey of 8,550 investors by Natixis Investment Managers (tinyurl.com/6j8uw3c5) found that 40% admitted that “it will take a miracle” to retire securely.

“Hoping it will last.” Waiting for a “miracle.”

A better approach? Know your numbers. Do some planning.

On another note, the deadline is fast approaching to apply for this year’s 401(k) Champion® Award, which shines a light on 401(k) participants who make good 401(k) decisions. If you want to compete for the award, you have until Oct. 1 to fill out an application at 401kchampion.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION