All right, ladies and gentlemen, good afternoon, we reached an exciting and for some of you a frightening aspect of retirement planning here in Module Two, lesson three. This is where we start to talk about investment risk, what it means for your growing buckets of money, and how to manage it. In the last video, we talked about finding someone you can trust to help you make good investment decisions. I suggested that if your financial literacy skills were weak, you should first Use Your God given people skills to find someone to help. All of the following module two lessons are designed to build your financial literacy skills, so you can better interpret the ideas and suggestions that appear from everywhere. You need to have a solid frame of reference if you're trying to match the tactical recommendations you get with the strategic goals you've set for yourself.

As humans, we've been conditioned since we started walking on two legs or before that survival rates are higher if we avoid risk, we instinctively know to stay out of the woods at night in cases There's something deciding we're a convenient meal. Many of us remember adults teaching us as children not to cross the street without first looking left and right. When it comes to the money we're accumulating to pay bills in retirement. Our first inclination might be to park it somewhere safe, like under the mattress or in a savings account where our principle is guaranteed. But if we agree we need to grow our money somewhere. We need to question those ancient assumptions and deal with risk proactively.

Let me share a story called the car and house story. It's about protecting at least some of your money from what I call downside loss. It's a way to remove an element of emotion and still capture a solid upside over time. Remember, when you bought your first car, it might have been a new one or a used one but before you drove it home, you made sure it was insured because damage to the car if you had an accident carries with it the risk of financial loss. Chances are it wouldn't be a total loss. But why assume the risk of an unwelcome $5,000 body shop bill You made sure there was an insurance policy in place, one that transfers risk to an insurance company in exchange for your premium.

There's a copy of the current house story in the resource vault. The same thing applies if you own a house or rent an apartment. If the place catches on fire is damaged in a storm, or someone steals from you, and you don't have insurance 100% of the economic loss falls on you. And insurance policy limits your financial loss if something bad happens, and for this you paid an insurance company to carry some of the risk of loss. Now shift gears and consider the buckets into which you are placing your future retirement assets. Are they subject to any kind of risk?

Any kind of economic loss? Yes, they are and what are you doing about it? What are the chances of something bad happening and a large chunk of your account goes away? How many years will it take you to recover? The lesson here is that large economic losses are painful. So to avoid that pain, we use insurance companies to share the burden.

Oh, yes, going broke safely. As you journey through life toward retirement, the plan is to have one or more buckets into which you're putting money to pay for retirement. One of those buckets might be a bank that guarantees your principle against loss. Okay, no chance of loss. So that's not a worry. But historically, banks annual rate of return on savings accounts or certificates of deposit is relatively low.

The bank is using your money to lend to others and paying you a small return for the use of that money. It's also guaranteed against loss. Your low rate of return is in effect an unpaid insurance premium. The problem is that historically, the money in that bucket is not growing as fast as the increase in the price of things you need to buy. That's the result of inflation. And it means you're now going broke safely.

I've put together another short video called your life in seven words. Here's the lesson. Financial or investment risk in and of itself is not a bad thing. It becomes a bad thing when you fail to manage it properly. If you have another 30 to 60 years to live, you need to be exposed to market risks. If you expect to have enough money to pay your bills, depending on how soon you expect to retire, no, there are going to be different rules for managing investment risk depending upon when you plan to retire or make that transition to retirement.

Understanding all this is difficult, but it can be done. You can either figure it out by yourself or you can find someone you can trust and let them help you. Here's a slide associated with another financial risk called a sequence of returns risk. This risk is a function of the year you were born and when you decide to retire. There's not a lot you can do to avoid it except explore the ideas I described in the car and how story. I know you already have a million things to do every day and perhaps don't want to be told about yet another insidious financial threat to your future financial freedom, but it exists.

In this slide two people each have $100,000 invested in the s&p 500. Both plan to work another 10 years and retire at 67 and live their life on the proceeds of that account. Due to the luck of the draw, the person on the left found they had almost 500,000 to work with at the end of 10 years. On the other hand, the person on the right who started their last 10 working years in 2001, had something less, they have a little over 115,000 not an outcome anyone would want. This second slide is only different in the sense that the person on the left retired in 1991, with $100,000 invested in the s&p 500 and began withdrawing 4% of their account every year. That's not an unreasonable percentage.

If you look back at yours, the person on the left ended the first 10 years of retirement and still had three Hundred $32,300 in their account, which isn't bad. However, the person on the right using the same metrics found themselves with 76,482 to work with for the rest of their life. Now that I've alarmed you with something over which you have almost no control, is there an answer? And the answer is maybe. For many who see this, their initial thought is to have a substantial chunk of their retirement accounts in a certificate of deposit. That way, they avoid what happened to the s&p 500 in 2001.

And again in 2002, and 2008. You might still be broke, but you wouldn't be as broke. This whole series of modules and lesson videos is about retirement. At what age will you retire? How long will you live? How much money will you need?

How long will it last? Will you run out of money before you run out of life? For some retirement is terrifying, most of which stems from money and the unknowns and a lack of financial literacy. Risk Management is more than putting money away for a disaster. It's about understanding and seeing the sleepy bus driver in the next lane over before she swerves in front of you. It's about dealing with risk and knowing how and when to use your brakes.

So when if or when the bus driver swerves in front of you, you're prepared. There are never guarantees. But if you find someone who truly understands your financial needs, they can take the edge off your fear and provide a level of protection. There are ways to allocate your money across the spectrum of investments stay invested in the markets and still effective transfer of risk to a third party. The choices these days are getting better and better. So yes, risk can be scary, but exposure to the markets with their inherent risk is necessary.

If you're going to have a successful retirement. You just have to know how to manage it. Looking again in the resource Vault for that blog I wrote based on an article by James Robinson. It was published on March 24 2017, and it's called downside risk management. In the next lesson I talked about the 12 primary reasons you could go broke in retirement. You don't want to go broke.