Cynthia de Fazio 0:23
Welcome to Retire Smart Maryland. My name is Cynthia DeFazio. Joined today by Prashant Sabapathi and John DeFeo of Elite Income Advisors. And to our viewers at home, as always, we welcome you to today’s show. And we’re going to talk about a very important topic: your risk tolerance, your risk capacity. Do you know what those mean? It’s very important when you’re in the retirement years to understand exactly how much risk you can actually take. If you’re taking too much risk, that can derail you. If you’re taking too little risk, that can also derail you. So thank you for being with us on today’s show. Again, we welcome you. We’re happy to have you here, Prashant. How are you today? I’m doing
Speaker 1 1:02
great. I’m excited for this episode. It’s going to be a really good conversation.
Cynthia de Fazio 1:06
Me too. It’s going to be wonderful. John, how are you? I’m
Speaker 2 1:09
doing great as well. Thanks so much for asking.
Cynthia de Fazio 1:10
It’s so good to see you both, and I know that you spend a lot of time in the office when people are coming in for the first time, and even your existing clients talking about risk, and so often people don’t even understand how much risk they’re actually taking. So Prashant, how can that be derailing if someone’s in the viewing audience today and they think they have a really good, solid portfolio, but perhaps it’s taking too much risk, or on the flip side, taking too little?
Speaker 1 1:37
Yeah, I think it’s an important conversation to have. So often I think people are not educated on how much risk they’re actually truly taking, and I think people are not necessarily always in tune with how much risk they’re truly, you know, comfortable taking. And so, marrying those two ideas together, like understanding how comfortable you are with taking risk, and then understanding what kind of risk your portfolio is actually subjected to at any given point in time. Two of the more important pieces of understanding risk tolerance and risk capacity. John, we talk about this idea of tolerance versus capacity all the time. Yes. Okay, and I think it’s natural to go into a financial advisor’s office, and they’re going to ask you that classic risk tolerance question, which is, “Hey, John, what’s your risk tolerance? And they’ll give you three different options: it’s conservative, it’s moderate, it’s aggressive, and you’re expected to give an answer. None of our advisors ask, “What is your risk tolerance? Okay, talk to the audience a little bit about how we communicate with clients on risk capacity and how that’s different than risk tolerance.
Speaker 2 2:49
Certainly, you know, and and I think it’s it’s a great question. And you know, if you think about conservative, moderate, aggressive, those are very subjective terms. That’s right. You know, my conservative might mean something much differently than your conservative. So when we talk about the risk tolerance and capacity, you know we want to identify what amount of money the client would be comfortable losing. Nobody’s comfortable losing money. Let me rephrase that. But how much could you potentially lose at any given time before you really start to feel uncomfortable with the plan that you have? So that helps us identify the risk tolerance portion where you feel comfortable with, and then we also look at the plan and say how much could you lose as you’re taking money out before that derails your plan. So that’s where the capacity comes into place, and we have to be able to pair those two concepts together to figure out the right direction to go with the investment. What one is
Speaker 1 3:38
emotional,
Speaker 2 3:39
yeah,
Speaker 1 3:40
and one is mathematical, right? It’s like how much risk can you take in order for your plan to still work versus how much risk are you actually comfortable taking? I always think about it kind of like one is diet versus calories, right? It’s like one is how hungry am I, and the other one is how many calories does my body actually need in order to function at an optimal state?
Cynthia de Fazio 4:03
Yes,
Speaker 1 4:03
and that’s how I think about this type of planning. So often, what we find is we’ll have a client that says, “Hey, let’s say I’ve saved approximately a million dollars. I’m just you know making up a a number. Saved approximately a million dollars, and you ask the question, how much of that million bucks could you lose before it makes you feel uncomfortable? And they might say something like $200,000 That’s approximately a 20% decline of the portfolio before they start to feel really uncertain about their ability to generate the retirement income that they need. Then we’ll do an independent analysis of their portfolio. One of the things that we’ll do is what’s called a stress test. We’ll simulate different market conditions to show you what your portfolio is likely to do in different scenarios, and we’ll run it through what we would call a worst-case scenario. Think back to 2008. Think about how much money you lost back in 2008. What if that was to happen? And again, and what we are finding in a lot of cases-not every case-but in a lot of cases, we’re finding that clients are subjected to a lot more risk than they’re actually comfortable with, and they didn’t know about it. And I always have that that that conversation with folks. It’s like when your advisor told you that you were subjected to 30, potentially 3040, 50% downside, and you told them that your risk threshold was around the 20% downside. What was that conversation like? And they’re like, “Well, that conversation never happened. Wow! I’m like, “Interesting. That’s really interesting. I feel like every advisor has a responsibility to understand what their client’s risk capacity is, what their client’s risk tolerance is, and try to optimize a plan in such a way that they have all the income they need while maintaining the risk parameters that are important to any single person. But it’s incredible to me how often we’re told by the people that come in to visit that this doesn’t happen.
Cynthia de Fazio 6:01
Wow. So again, it’s all about conversation, and so often I know when people are coming into the office for the very first time, you’re asking a lot of questions that they have not been asked before. So, John, let me ask you a question in your professional opinion. When you see someone come into the office and they tell you that they are moderate, let’s just use that term if we could, please. And you run the portfolio X-ray, and all of a sudden you’re noticing that they are in a highly aggressive portfolio. Tell me about that conversation. What does the person’s face look like, number one, and then how do you help mitigate that? Yeah,
Speaker 2 6:37
I think it’s a lot of shock, especially when they were told by a potential advisor that they were in a more moderate type of portfolio, where maybe there’s you know a medium range, maybe 50 to 60 percent aligned to the stock market, but they’re actually exposed to much more downside risk than they had planned. We have to talk about that scenario. So it’s a lot of surprise and shock, kind of the deer in the headlights kind of look, and the next question is, how do we fix this? You know, how do I ensure that I can still grow this money without the risk of losing significant amounts of assets during a bad period of the market? So, we talk a lot about the bucketing approach, where we assign specific objectives to each bucket of money, where you’ve got a bank bucket that is just going to be for your liquid cash, you know, your emergency fund, your day-to-day operations, a green bucket, which is where we where we want to create income. We have more security in that type of investment, and then we have the red bucket where we are comfortable taking risk. This is the long-term bucket, right? We’re not using this money in the short term. If we do see a correction in the market, we have time to recover, and we have that green bucket to actually take the income from.
Speaker 3 7:44
Okay,
Speaker 2 7:45
so that’s how we create that plan to address the risk and allow there to be growth and income potential combined.
Speaker 1 7:50
So before we get to the break, I want the audience to really think long and hard about this question. If your advisor has never asked you this question, I think you should start thinking about it right now because when you come in to visit with us, I will ask you this question. John’s going to ask you this question, and we’re going to hope that you’ve already began the process of thinking about. And that is, with however much money you have saved for retirement, I don’t care if it’s a quarter of a million dollars, a million dollars, or $10 million Whatever your number is, how much of that money could you lose if the market was to go down before you start to feel uncomfortable about your ability to generate the income that you need in retirement? How much could you lose before you start to feel uncomfortable? Okay, what we’re going to do is we’re going to give out a free copy of my book. Chapter two of this book is is dealing with the five deadly risks of retiring today, one of those risks is the risk of the stock market and the volatility, the ups and the downs. You’re going to read about it in this book. All you’re going to do is you’re going to visit retiremaryland.com. It’s retiremaryland.com. You can scan the QR code at the bottom of the screen. I’m going to send you a free copy of this book, Fiscal Health Retirement Wealth. It’s going to give you a bunch of knowledge to deal with some of the deadly risks of retiring. Once you get this book and you give it a read, you can also call the the phone number, schedule a complimentary visit with our team of retirement advisors to talk about your situation specifically. That phone number, folks. It’s 833308 5200 How much could you lose before you start to feel uncomfortable?
Cynthia de Fazio 9:25
Prashant, thank you so much. John, thank you so much to our viewers at home. Once again, the number to call is on your screen: 83330852008333085200 Or we also welcome you to open up your camera app on your smartphone, click on the QR code at the bottom corner of your screen. That will also enable you to get a copy of this beautiful book written by Prashant, fiscal health, retirement, wealth, and you don’t want to miss Chapter Two. If you’re questioning if you know your risk tolerance and you’re unsure, we welcome you to grab a copy of this book. When we come back. After this very short commercial break, we talked a little bit about understanding your risk tolerance and your risk capacity. Well, what if you’re taking too little risk? What if you’re too conservative? We’ll be right back momentarily. Stay tuned.
Speaker 1 10:20
Having a true written financial plan provides peace of mind in a way that nothing else really can.
Speaker 4 10:28
In our job, we want to make sure that we give it to our clients the guaranteed income stream for the rest of their lives, so they don’t have to worry about what’s going to
Speaker 1 10:38
happen. As a specialist in distribution, we’re helping people make sure that their money is going to last for the rest of their lifetime, so that they never run out of income, and minimize that tax consequence along the way, and then help transfer that to their heirs in the most tax-efficient way.
Speaker 4 10:55
I think the most important to me in the financial planning is the first of all, you need to understand what the client wants. It’s all about the client.
Speaker 1 11:03
So much of what we do at Elite Income Advisors surrounds helping people understand exactly where their paycheck is going to come from, how much it’s going to be, and making sure that, most importantly, that it increases through their retirement.
Cynthia de Fazio 11:22
Well. Welcome back to Retire Smart Maryland. My name is Cynthia DeFazio, joined today by Prashant Sabapathi and John DeFeo of Elite Income Advisors. And if you’re just joining us for the first time today in this segment, we’re talking about understanding your risk tolerance and your risk capacity, and what happens if you’re being too conservative. So often, emotions can drive some of your decisions when it comes to financial planning, and we’re doing a deep dive into that today. Thank you for being with us. So, gentlemen, a great topic to talk about: understanding someone’s risk tolerance, risk capacity, tying that into. I’m just going to talk about the conservative investor, if I could, for just a moment. This is a person that’s nervous about any sort of losses, which we understand that feeling. And again, that’s more of an emotion-driven decision. Prashant, what are some of the ramifications of being too conservative, being too afraid, being nervous when it comes to investing?
Speaker 1 12:16
Look, before I answer that, if you’re sitting on the couch thinking, “Hey, that’s me. I’m that person who doesn’t want to lose a penny of my hard-earned retirement assets. I get it. It’s a natural feeling because John said in the last segment, nobody likes losing money. Nobody wakes up saying, “Hey, yeah, I can’t wait to lose money today. Right? Like that is not a feeling that is, you know, very uncommon. So, with that being said, if this is you, that’s okay.
Cynthia de Fazio 12:44
Yes,
Speaker 1 12:45
but there is risk to not earning enough on your capital, right? And that is what happens if prices go up. If if we’ve learned anything the last couple years, what we’ve found is that the cost of living is going up, folks. And so your money might be sitting in a bank account, or maybe it’s in a CD, maybe it’s in a money market, and at least it doesn’t have the risk of losing principal. At least in theory, it shouldn’t have the risk of losing principal sitting in a bank. But that being said, you got to ask: Is it losing purchasing power?
Cynthia de Fazio 13:17
Wow!
Speaker 1 13:17
As the inflation rate goes up, if you’re not matching at least that inflation rate after taxation, I would argue that you’re losing purchasing power. It’s what I call losing money safely. Okay, and it’s not that you’re losing principal; it’s that you’re losing your purchasing power. And so, what happens 10 years from now, 15 years from now, when the cost of living potentially is a lot higher, and your assets have not necessarily appreciated to match that. What are you going to do? What it’s going to put you in a position to do is be at a greater risk of running out of money, folks. That’s what it is, and so there’s absolutely a risk associated with being all into the stock market. Clearly, we’ve seen big market declines over the course of time, tremendous returns as well. But I think there is a huge risk associated with not earning enough on your money, and unfortunately, we see a lot of people who just don’t want to take the risk, so they’re looking for alternatives. John, maybe you can talk about one or two of these alternatives, like how do you position idle money that’s just sitting in a bank to earn a little bit more than what it’s currently earning, yet manage the risk profile of that capital along the way?
Speaker 2 14:33
Great question. And I think recently, you know, we’ve had a bit of a higher interest rate environment ever since 2022. Yes. So it was easy to get a safe rate of return at the bank through a CD through money market accounts. So we’ve seen a lot of value in those, but we know that the Fed is planning to continue cutting rates, right? Where they’re trying to get back down to more of a roughly 2% target for interest rates. So if we get to inflation, right for inflation, right, right. So if we find. That these types of solutions are not offering the interest rates that we need, then we have to look elsewhere. Yeah. Okay. One solution that we really like that makes sense for some of our clients is called a fixed indexed annuity. Okay. And this is a way that you can protect the principal from market volatility. That’s the fixed portion, and align it to stock indexes where you can have market-like returns. It’s not going to be all the returns in the market because there’s no downside potential. So that’s the index part, and then it’s an annuity. So this can be used to create income. It can be used to provide stability. But genuinely, or generally, you’ll have a slightly higher rate of return potential in that type of a solution than something at the bank that has that fixed rate of return.
Cynthia de Fazio 15:42
Wow. Okay, that’s interesting. This is
Speaker 1 15:44
becoming a tremendously popular option. What we found is that people like protection. People like the idea of being able to put their money somewhere where the market cannot deteriorate the principal. Yes. And then if you add this component, that if the market goes up, your account value could potentially go up as well. That’s pretty attractive to some people. And then here’s the best part about that fixed indexed annuity: is once you earn interest, like let’s say you get to your anniversary date on the annuity and you ended up earning interest for the year, that becomes your new floor. So after you’ve earned interest, you can never lose it due to a market decline. And so the trade-off, because there’s always a trade-off, the trade-off is when the market goes up, you might not earn all of what the market earns.
Cynthia de Fazio 16:33
Interesting, but
Speaker 1 16:34
you get protection. And so at this stage of the game, what is more important is making the most amount of money possible is that the most important thing, or is it more important to protect your life’s work-three, four decades of hard work, what you have in your retirement accounts? I’d say it’s equally, or even more important, to protect what you have rather than just chase the highest rate of return possible.
Cynthia de Fazio 16:58
Sure, sure, that makes sense. And John, I should ask you as well the emotional aspect of investing. Talk a little bit of how that can impact the retiree. If you’re feeling emotion, the two emotions that we know the most through Warren Buffett, fear and greed, right? Yeah. So talk a little bit about that. How does that impact an investor, especially someone in their retirement years, if they’re reacting from an emotional viewpoint?
Speaker 2 17:21
Great question. I mean, we are emotional beings as humans, right? We make decisions based on our emotions and then try to justify it with rationale and logic. So, to try and eliminate the emotional aspect, we have to have these conversations and prepare them for things that could happen. Ensure that we have a safe bucket of money that keeps their income out of risk, right? That we have the bucket that provides the growth that they need, but ultimately, there’s really nothing that you can do about the emotional state of people. You know, typically they’re going to make the worst decisions when there is something going on in the world, right? When are we going to sell? When the market’s down because we’re afraid. There’s fear there, and then how do we know that we’re not missing out on the returns as it recovers because we got out at the wrong time? So it goes.
Speaker 1 18:09
I totally agree, and and what I found is that the deeper and deeper you get into retirement, the more connected you are with that account balance. Sure, you feel the fluctuations more. You get you get that feeling of euphoria much stronger when the market’s up and you make money. But then when the market goes down and you lose money, that’s exactly the type of thing that causes this emotional pain. Look, if you’re working with an advisor, I’d argue you’re not necessarily working with an advisor to manage your money. You’re working with that advisor to help you manage your emotions through the tough times. And what is a better way to manage your emotions than to have a financial plan that you can rely on when times get tough, so that you know that your income is always going to be protected, right? And there are strategies you can use to ensure that you have income coming in every single month, and I think that’s what could offer a lot of our viewership some peace of mind. We created this website. It’s called the EIA Risk Quiz. Okay, maybe you’re sitting at home thinking, “I’m not sure what my risk capacity is, what my risk tolerance is. Visit this website. It is eiariskquiz.com. Eiariskquiz.com. Short questionnaire. This thing will take you probably less than 10 minutes to complete. It’s going to give you an opportunity to understand where exactly you are in the risk tolerance process, and you’re going to help to answer that question of how much can I lose before I begin to feel uncomfortable, totally free of cost to use that risk quiz. Now, additionally, we like giving away some free stuff on the show, so this one is my book, of course, fiscal health, retirement, wealth. I’ll send you a free copy of this book. You just have to visit retiremaryland.com. Answer a few short questions. We will send this out to you as soon as possible. RetireMaryland.com, or you can scan this QR code at the bottom of your screen.
Cynthia de Fazio 20:10
Prashant, thank you. John, thank you to the viewers at home. The number to call in 833-308-5200 or just grab your smartphone and click on the QR code at the bottom corner of your screen. If you’re looking for that website once again with that quiz, let me give that to you. It is eiariskquiz.com. Eiariskquiz.com. Especially if you’re in the retirement years, you deserve to know how much risk you’re currently taking. Again, eiariskquiz.com. We’ll be right back momentarily on Retire Smart Maryland, stay with us.
Speaker 1 20:43
Are you taking too much risk with your retirement, or not enough? Most people aren’t sure. That’s why we created the Risk Quiz. In just a few minutes, it helps you understand your personal risk capacity and whether your current portfolio lines up with it. Your risk score could reveal why your current investments might feel too aggressive or even too conservative. It’s simple, fast, and eye-opening. Scan the QR code on the screen or visit eiariskquiz.com to take the quiz and find out if your money matches your mindset.
Speaker 3 21:19
You know how much you’ve saved for retirement, but do you know how much of it the IRS will take? Require minimum distributions, Medicare surcharges, and Social Security taxation could all chip away at your income. A Roth conversion may help reduce future surprises, but only if it fits your situation. Want to know your true tax exposure? The better you understand your risks, the more options you have. Scan the QR code on the screen or visit eiarothquiz.com to take our free Roth conversion quiz today.
Cynthia de Fazio 21:55
Welcome back to Retire Smart Maryland. My name is Cynthia DeFazio, joined today by Prashant Sabapathi and John DeFeo of Elite Income Advisors, and we’re talking all about understanding your risk tolerance and your risk capacity, especially in the retirement years. So thank you for being with us today. You know, gentlemen, I’m thinking to myself, probably viewers in the audience right now, they’re saying, “Well, gosh, would there be any red flags that I should be looking for if my goals for retirement seem misaligned with where I currently am with my portfolio, Prashant. What are some common red flags?
Speaker 1 22:29
I think internal fees are a big deal, and I think a lot of people do not understand what that means. Okay, so when I say internal fees, you might be having a portfolio. Let’s say it’s comprised of a bunch of different mutual funds. Well, every one of those mutual funds has what’s called an expense ratio, which is the the fancy industry word for management fee. So there’s somebody managing that mutual fund, whatever company is administering it, and they’re charging you an internal fee. Well, the higher that internal fee is, the more it cuts into your ability to actually make a return. And by the way, John, do you still pay the management fee when the market goes down?
Speaker 2 23:13
Certainly,
Speaker 1 23:13
absolutely. And so, what happens if you’re taking too much risk and that management fee is compounding on top of your losses, right? This is what I call financial termites. Okay, they just eat and eat and eat away at your portfolio until you find out maybe 510, 15 years later, and by then they’ve already done the damage, right? But so many people don’t know how many financial termites are actually in their portfolio. So one of the things that we’ll do for you when you come in to visit with us, we’re going to run a risk analysis. It’s a third-party risk analysis, totally independent analysis of your portfolio. And one of the things that we will look at is the red flags associated with paying higher than average expense ratios. Now, what I’ve seen is I’ve seen expense ratios that are through the roof that clients had no clue of. Very few cases I do see people come in and their expense ratios are ultra low, which is exactly what we would love to see from a fee standpoint in the portfolio. If you’re not sure what your expense ratios are, just pick up the phone and give us a call. It’s 833308 5200 I also talk about the importance of managing fees in the book as well. And so get your free copy of this book. It is an easy read. Read it once, read it twice, give it to your friend when you’re done. RetireMaryland.com or scan the QR code. I’ll send you a free copy of the book.
Cynthia de Fazio 24:40
I love that. And I have to ask John. Obviously, I know that you work with a lot of couples out there that are married, husbands and wives, and they’re coming in. They’re going to sit with you and the team for the very first time. What happens if they take this quiz and they have two totally different perspectives on what risk is? How do you help solve that issue? You
Speaker 2 24:58
know, it’s it’s interesting because it happens. More often than not, where there’s one spouse that’s really comfortable in the market and really comfortable with risk, and the other one doesn’t want to lose a dime, right? So how do you make both of these people happy, right? And I think you know it’s all about the coordination. It’s all about the planning. You know, talking about the buckets. You know, if each of them can have a bucket that they feel comfortable with, does that help with the situation, and one of the questions that we always ask, especially for the conservative investors, are if there was a way to create certainty in your income, and you had a bucket that addressed just that income need, would that not empower you to feel comfortable taking risk in the other money that you don’t have to touch in the short term? The most of the time, the answer to that is yes. I would feel more comfortable. Sometimes, you know, we have to have a little bit more coaching and and and counseling with those clients. But I think at the end of the day, if as long as you have a plan that addresses both sides of that equation and and makes both of them happy, and it is going to work out for them at the end of the day,
Speaker 1 25:58
it’s all about addressing the why, isn’t it like okay you’re not comfortable taking risk why is that did you have a prior experience where you lost a bunch of money and so you’re very nervous about it is it that you just can’t stand the thought of losing your hard-earned retirement savings that you spent three or four decades accumulating is it that you fear that by losing too much money at the wrong time-that you fear that you’re going to run out one day, right? Everybody’s why is a little bit different, and so part of the process when you come in to visit is not for us to say we should put our money here or there or this bucket or that bucket. I mean that’s important, but it’s really to understand your why. What are your concerns, and what options are there to concretely address them? What we’re finding is that there’s a lot more options than people actually know about. And so, if there are alternative strategies out there that could help you address some of your concerns, wouldn’t you like to know about them before you got to retirement? Yes, absolutely. And so that’s all this is, folks. If you dial that phone number, it’s 833308 5200 You can schedule that complimentary conversation with our team of advisors. You’ll come in. It’s a confidential conversation, and we’re there to help you address specifically the things that are important to you. Maybe it’s you’re not sure how much risk you’re taking. Maybe you’re not sure if you can afford to take even more risk, and you want to. It’s a great opportunity to sit down, talk about it. Totally free to come in, but you have to have your calendar in front of you so that when you call in, we can schedule you for that visit. 833308 5200
Cynthia de Fazio 27:35
Prashant, thank you so much, and John, thank you so much to our viewers at home. The number to call 833-308-5200 83330852008333085200 to grab a copy of your book. Be safe, be happy, and be blessed. We’ll see you back one week from today on Retire Smart Maryland. Take care.
