7 ways to risk manage your money

Posted by Shelly Eweka.
Whenever someone comes to me and says they’ve stashed their savings away somewhere “safe,” it’s a giant red flag. Because what they usually mean is, they’ve put their money somewhere that merely feels secure. For instance, inside a heavy-duty, triple-layered, fire-resistant safe.
It’s time to wake up and smell the coffers: Nothing is 100% safe—not even cash kept in one. No matter how much you protect it from thieves, fire or earthquakes, cash remains vulnerable to the corrosive effects of inflation–wherever it’s kept.
All asset types–cash, bonds, stocks, real estate–have some form of uncertainty built in. And yes, that can be scary. But you can’t avoid risk altogether. Instead, you can avoid letting your fears paralyze you into inaction–and ultimately regain control of your financial destiny. To address this, you’ll need to confront your fear of risk-taking head-on.
Here are 7 key risks that may pose a threat to your nest egg–along with practical steps for managing each one:
Inflation. One of my preferred pastimes involves complaining to my husband about the price of food—I remember grocery shopping with my Mom, when chicken was 19 cents per pound. Inflation is one of those silent threats that stealthily creeps up on you, catching you unawares. Next time you’re in the supermarket, check out the price of a favorite childhood candy bar, and you’ll see what I mean. To tackle inflation risk, make sure your investments are properly diversified1 among stocks, bonds, guaranteed, real estate and cash investments. Inflation was 2.11% in 2017, and typically around 2-3%, but sometimes higher. 5 As I write this, the most generous 5-year Certificate of Deposit available online is offering 3% APY, while the top savings account is paying around 1.5%.
Longevity. Long life seems more like a reward than a “risk,” but that’s the best way to frame the all-too-likely prospect of outliving your nest egg. One way to guarantee income for life2, and retirement readiness, is with an annuity3, which can convert a lump sum paid upfront into a lifetime of regular payments. Also, the longer you live, the more likely you are to need expensive long-term care–the kind not covered by regular health insurance or Medicare. A long-term care insurance policy can protect your family and estate if you need care later in life, but be aware that premiums can be high, so talk to your financial advisor about the different options for handling long-term care costs in retirement. Even near-retirees need to think about potentially long timeframes (and longevity risk). In other words, you probably won’t need access to all your funds right away, and also need to stomach some market exposure through retirement, since stock investing4 can help manage inflation risk.
Overspending. This one should be familiar to anyone who’s gotten into debt, and had to spend money to climb out of the hole. Better spending requires a good deal of self-awareness, so be honest with yourself. Are you extravagant? Your last credit card statement can function as a mirror to your spending soul, especially if it breaks down your expenditure into “restaurants” and “entertainment” etc. Are you spending reasonable amounts on clothing, eating out? If indulging yourself has become the norm, one simple but effective solution is to invest more of your money. You only spend what you see, and keeping money out of your checking account will train you to spend at a reduced level. Set up direct auto payments to your Roth IRA or emergency fund on payday.
Investment risk. When deciding how to allocate our assets, we are often influenced by our coworkers. Evidence shows that people are likely to increase their risky share when they see coworkers earning above-average equity returns on their investments. 6 I’ve definitely seen this happen with a coworker putting her whole nest egg into the equities basket just because another coworker did–then selling those shares at the wrong time, after a market dip. The danger here is not the market, but your impulsiveness. You become the risk. Of course, it’s logical for younger investors to invest more aggressively, since they have longer timeframes, but your risky share should also be based on your comfort factor. Everyone should take a risk tolerance questionnaire to determine their risk level. This, rather than what your cohorts are doing, will help determine how your money should be invested. Diversity is key. Not too exposed to the market, not too conservative.
Dying early. This one is difficult to confront for obvious reasons, but it needs to be faced all the same. What you need to think about specifically is whether your children or other dependents, would be OK financially, were anything to happen to you. Life insurance isn’t just about peace of mind for you (although it may give you that), it’s about providing for your loved ones after you’re gone. How much would be enough–twice your current salary, 10x the amount? Every family is different, so don’t just go along with your default employer policy. Maybe it provides too much coverage, or not nearly enough.
Accident or illness. If you drive, you’ll know all about auto insurance, which can cover you in the event of being sued. You’ve likely given less thought to insuring yourself in the event of an accident or sudden disability. Again, it’s not something we want to think about, and you may already have disability coverage through your employer, but do you know what your policy covers? A surprising number of people don’t realize what coverage they have. As with life insurance, you need to be smart about how you manage the various risks: Understand when you need disability insurance and when you don’t; every family situation is different, and there’s no one-size-fits-all policy.
Job loss. The job market is a lot more precarious than it used to be, and job security is no longer taken for granted. It’s no wonder that anxiety disorders are on the rise. But you can reduce your anxiety levels dramatically–not with a doctor’s prescription, but through having an emergency fund big enough to cover at least 6 months’ worth of living expenses. Savings target: Calculate how much you could get by on each month and multiply by six.
Managing all the competing financial risks in our lives can be a job in itself, so it’s OK to ask for help. The same way we go to a hairdresser, knowing we could cut our own hair, so too should we trust the expertise of a financial advisor–after all, the risks of a badly dented nest egg are more severe and longer-lasting than a bad haircut.
1 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
2 Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
3 Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
4 Stock investing involves risk including loss of principal.
5 StatBureau.org
6 “Social Interaction Effects and Individual Portfolio Choice,” Pension Research Council Working Paper, https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2015/09/PRC-WP2011-19-Lu.pdf, September 2011
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs opinion or other information you obtain from the Woman2Woman:Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
July 12, 2018