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Using a Risk Curve to Simplify Retirement Planning for Clients


Risk is an important consideration when helping clients shape their retirement plans to achieve the outcomes they desire. One tool you may rely on to help clients visualize potential outcomes is the risk curve. In simple terms, a risk curve illustrates the tradeoff between risk and reward. When used in a financial planning context, risk curves can be used to help clients visualize how their spending choices may translate to a higher or lower risk of running out of money in retirement.

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What Is a Risk Curve?

A risk curve is a visualization, usually a chart or graph, that’s used to show the relationship between risk and return for two different variables. The vertical or x-axis represents risk while the horizontal or y-axis represents returns. Plotting data points on the graph allows you to see how returns increase or decrease, relative to the level of risk.

Risk curves are often used in business to determine potential outcomes for specific investments. For example, a business that’s debating whether to open several new locations or expand its product line may use a risk curve to shape decision-making. If the risk for a particular project outweighs the reward, the business may decide not to pursue it.

Likewise, financial advisors can use risk curves to help clients better understand what their retirement picture might look like, based on the spending decisions they make. Specifically, advisors can use risk curves to illustrate the probability of a client’s plan succeeding based on how much money they withdraw in retirement annually.

How the Retirement Risk Curve Works

When discussing risk curves as a retirement planning tool, what you’re really talking about is spending risk. In other words, how much can your client comfortably spend annually without putting themselves at risk of running out of money.

There are distinct factors that can influence financial outcomes in retirement, including:

  • Your client’s target retirement age
  • How much they’re saving pre-retirement
  • What, if anything, they’ll continue to save and invest in retirement
  • Annual rate of return
  • Social Security benefits
  • Pension benefits, if applicable
  • Life expectancy and long-term health care needs
  • Inflation

The spending risk curve is designed to take these factors into account to demonstrate how spending at various levels may amplify or reduce the possibility of having a shortfall in retirement. The y-axis of the curve operates on a range from 0% to 100%, with 100% representing the greatest likelihood that their financial plan will succeed. As spending in retirement increases, the odds of the plan’s success go down.

How to Use Risk Curves When Developing Retirement Plans

A financial advisor reviewing risk curves to discuss a retirement plan with a client.

The primary reason for using risk curves when discussing retirement plans with clients is to help them gauge what the financial outcomes might be based on different assumptions about annual spending. That, in turn, can help you to shape their retirement plan based on the level of risk they’re comfortable taking.

Again, it’s all about trade-offs. Is your client willing to spend less money annually to ensure they’ll be fully funded throughout retirement? Or would they be comfortable with a higher risk of running out of funds to be able to spend at higher levels annually? The spending risk curve allows you to test different spending levels to find your clients’ preferred baseline.

For example, say you have a client who’s planning to retire with $1.5 million in assets. They expect to spend 30 years in retirement and earn a 5% annual return each year, with an inflation rate of 5%.

Using those numbers, they’d be able to spend $50,000 annually with zero risk of running out of money. But what if they want or need to be able to spend $75,000 a year in retirement? Assuming inflation and returns remain the same, they’d run out of money in 20 years.

Illustrating that possibility using a risk curve can be helpful for starting a conversation about how to anticipate that scenario. For example, if your client is committed to spending at that level that’s an opportunity to discuss what investment changes may be necessary to generate additional growth that can cover the shortfall.

You can also use risk curves to establish a comfort zone for risk with an upper and lower limit or build in contingencies for life changes that may affect a client’s outcomes. For example, if your client is in the preliminary stages of building their career their ability to save and invest for retirement might look quite different 10 or 20 years from now when they’re hitting their peak earning years.

That added income may open up new opportunities for them to increase their investments toward retirement, but they might be less tolerant of risk in their 40s or 50s than they are in their 30s. As their advisor, you have the delicate task of balancing all of those different variables. The good thing about risk curves is that they can be updated to reflect where the client is in their life cycle at any given time.

Frequently Asked Questions

How do you build a risk curve model for clients?

Retirement planning software can help with generating risk curves for one or more clients efficiently. You may find risk curve calculators or modeling tools built into portfolio visualizers as well. Depending on which tool you’re using, you may be able to construct risk curves that incorporate buffers or safety measures to account for fluctuating income rates, withdrawal rates or inflation rates.

What is the retirement risk zone?

The retirement risk zone is the period spanning the last few years before retirement and the ones immediately following afterward. This window can be crucial for determining retirement outcomes, as the decisions clients make with investing and saving pre-retirement and post-retirement spending can affect their long-term financial outlook.

What is the biggest risk in retirement?

The biggest risk clients face concerning retirement is the possibility of running out of money. That can happen because they didn’t save enough to cover basic living expenses, or they did but their investment performance didn’t meet their expectations. Significant market fluctuations and rising inflation can also diminish the value of clients’ portfolios.

Overspending is another issue financial advisors may encounter that can cause a client to be underfunded. Creating a spending risk curve can help clients better understand how their retirement security may be affected by their annual withdrawal rates.

Bottom Line

Clients discussing their retirement plan with a financial advisor after using a risk curve.

Using a risk curve can help you better tailor your advice to your clients’ needs so they’re able to get where they want to go in retirement. And happy, satisfied clients can mean a more sustainable business for you in the long run.

Tips for Growing Your Advisory Business

  • If marketing is proving to be challenging, you might consider a simpler solution. SmartAsset AMP (Advisor Marketing Platform) is our holistic marketing service that financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
  • Building out a tech stack for your advisory firm can be challenging if you’re unsure which tools you need. At a minimum, you may need retirement planning and financial planning software, accounting software, data organization and storage tools and compliance software. When comparing options, consider the full range of features offered as well as the cost, and the type of support you’ll have access to if you need help implementing software solutions.

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