By Douglas Goldstein, CFP®

The way risk is presented often affects the way it’s perceived. When preparing financial plans, I look at the client’s chances of success (i.e., dying with an estate worth X amount). If the chances of success are low, I look at factors that the client can control to increase his chances (i.e., increasing savings, decreasing spending, retiring later, etc.). If the plan shows high chances of success, I look at the factors that could be changed in order to improve the person’s current lifestyle without harming anticipated future success.

What is a “high” or “low” chance of success? Unfortunately, there is no magic number. People’s judgments about risk are subjective. One 50-year-old might be satisfied with hearing that he has an 80% chance of success, while another might not sleep well at night until his odds of success have increased.

Which is riskier?
If I tell someone that he has an 80% chance of meeting his retirement goals, it may sound pretty encouraging. In fact, clients are frequently happy to continue with that status quo. However, in “real” terms, 80% translates to one in five people in similar situations where the clients outlive their money. I certainly wouldn’t want to be that one!

People may not be enthusiastic about receiving 5% returns when inflation is 3%. But the same investor may be happy to get a 7% return when inflation is 5%. While both are receiving the same 2% real return, the second scenario seems like a better deal because the numbers are higher.

Don’t let numbers lie
Don’t be lured into a false sense of complacency because a statistical simulation gives you X% chance of success in your financial plan. Think about the number that you feel you need to achieve in terms odds of success. Before you accept a percentage of chance of success, ask yourself if this grade is really appropriate. Remember – even if the market fluctuates, you play a large part in determining your financial success.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc. Member FINRA(formally NASD), SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book, Building Wealth in Israel: A Guide to International Investments and Financial Planning, (with a guest chapter on taxation by Leon Harris, International Tax Partner, Ernst & Young) is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942. Building Wealth in Israel, ISBN 193268784X 308 pages