Feb 18, 2016 5 min read

Retirement today is much different from when our grandparents and even our parents finished their working career. Back then, most people worked for one company their entire lives and often generations would follow each other to a company.

Families often lived near each other, and it was rare when a member moved across the country. People often lived in one house for most of their lives and the mortgage was paid off before retirement.

As family members aged, each would assume different roles in the group’s structure. Older members might provide care for younger children while the younger generation would provide more help maintaining the extended family’s property.

Often there was only one wage earner in each family unit. Credit cards were not widely used and most people carried little debt.

From the mid 1980s and before, very few working people owned stocks. Most people who had a retirement plan at work were covered by a defined benefit plan – a pension – provided by the company. It made the contributions on behalf of the employee and assumed all of the investment risk.

This model became expensive when companies had to compete with lower cost competitors from overseas. Most private companies started to phase out defined benefit plans and go to defined contribution plans. Instead of guaranteeing a specific benefit, they listed what would be contributed on behalf of the employee. This transferred the investment risk away from the company and onto the employee.

This further evolved until today, where most private employers are only offering 401(k) plans. Employees defer some of their current income into the plan in return for a tax benefit. Sometimes companies provide a match up to a certain level. Employees then select from mutual funds or other investments hoping to grow their retirement balances. With this evolution, many Americans became investors in the stock market.

Suddenly, common citizens were interested in how the market was performing. Their interest was followed with an explosion of news in newspapers, internet and financial television networks. While these changes provided new opportunities, they also created new challenges. People were now in charge of how prosperous their retirement would be. If you did not save enough, you were limited in what should be your expectations. If you take too much risk, you could lose everything and if you are too conservative, you might not keep up with inflation. The need for financial education is greater now than any time in our history. Unfortunately, many people are not exposed to these issues while completing formal education programs.

Today, many people do not understand the pros and cons of the investments they own. There are three factors that influence every investment. There is no perfect investment. There will be trade-offs, which is okay as long as we plan for them.

1. Liquidity: How fast can we turn our investment to cash and at what cost? Will we get the full amount of value back or a lesser amount? The need for liquidity can be reduced by having an adequate emergency fund. Everyone needs to have money available for all of the things that happen in life. Maybe the hot water tank breaks or you need auto repairs. Even worse, you could lose your job. Most planners suggest six months of living expenses should be easily accessible for these needs.

2. Risk: How likely is the possibility that your money will lose value? The amount of risk that you can assume depends on a number of factors in your life. If you own a lot of assets you may be able to assume more risk than someone who has a more limited net worth. Age is also an important factor. The older you are usually the less risk you should assume. This is because you have less time to make up any losses. If you need to start taking retirement living expenses out of your 401(k), market losses can be devastating. A good tool is to look at is the Rule of 100. Take 100 minus your age. Under this scenario, someone who is 60 should have 40 percent in equities.

The main takeaway from this is that you should never take more risk than you are comfortable with. You shouldn’t believe that the stock market only goes up or that you will change your investment after a market rebound. This could be dangerous and might not happen in your time frame.

3. Return: You must get a higher return if you take on more risk. Remember, investments with the highest possible return also have the risk for the greatest possibility for losses. Balance all three elements in your total portfolio so that you are ready for whatever happens. Do not be greedy, but don’t be in denial, either. This often leads to future problems.

Gary Boatman is a Monessen-based certified financial planner. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com