An opportunity to explore your real risk tolerance

Volatile markets often reveal a gap between what people say about their tolerance for financial risk and how they respond in real-world situations. In uncertain times, it may be especially appropriate to assess the amount of risk you’re taking with your retirement nest egg.

Many of us have some level of investment in the stock market — mostly in retirement plans such as 401(k)s. Periods of extreme volatility can bring a wide range of reactions, leaving some burying their heads while others ride the turmoil with ease.

However you weather the ups and downs, uncertain times like these can test our ability to tolerate financial risk. You can use the experience to get a better feel for your financial “comfort zone” — and tailor your retirement plan to match.

Think about how you felt at different times during extreme market swings by asking questions like:

·       What was the hardest?

·       What were my fears?

·       Did I feel compelled to take action with my retirement savings plan?

·       What actions, if any, did I take?

Depending on your answers, this may be a good time to reassess your plan. People in or nearing retirement, for example, may want to dial back their exposure to market risk. Others may feel comfortable taking more risk in exchange for potential gains.

If you’re unsure of how much risk is too much, take our quick interactive quiz that can help prepare you for a conversation with a financial professional about staying in your comfort zone. A solution that combines growth potential with a measure of protection from market loss may help some individuals feel more confident about staying on track for the long-term.

Depending upon your risk tolerance, two strategies that may be worth considering include allocating more savings to fixed-income options and purchasing an annuity. While all annuities are designed to provide future income, many people don’t understand how their distinctive features can help supplement a well-diversified retirement portfolio. Here are some different types of annuities with a quick description:

 Immediate Annuity. Carrying the lowest risk, immediate annuities convert a premium payment to a guaranteed income stream for life, or for a specific period.

Fixed Annuity. These offer a fixed interest rate that’s guaranteed for a certain time period. The guarantee may appeal to people who are willing to sacrifice the potential for higher returns if rates rise.

Fixed Indexed Annuity. This type of annuity has become increasingly popular with people with a moderate appetite for risk. Interest credits are earned based in part on the upward movement of a stock market index with the protection of a zero percent floor. If the net change in the index over a given crediting period is negative, zero interest credits are earned for that period, but never less than zero.

Registered Index-Linked Annuity. These products are designed for individuals with a higher risk tolerance. Registered index-linked annuities offer the potential for index credits tied to index performance while providing a measure of protection from market loss.

Variable Annuity. This type of annuity offers the highest growth potential, but depending upon one's allocations, they may leave individuals exposed to market loss. 

These uncertain times may have led you to rethink your appetite for risk and the effect it could have on your retirement years. Now may be the time for you to talk with a financial professional about strategies to help keep your retirement savings plans on track.