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Client Memo: Understand and Mitigate Risk

Retirement is unavoidable as people cannot continue working forever. Therefore, planning for retirement is vital to facilitate a comfortable life in old age. The planning evolves over time and is a multistep process. For an individual to have a fun, secure, and comfortable retirement, they must build a financial cushion. This memo describes the important factors to consider when developing a retirement plan, highlights the relationship between risk and return in retirement planning, and discusses how risk factors impact the allocation of assets in retirement planning. It will also analyze how fiscal and monetary policies may impact retirement plans and the implications of the time value of money (TVM) with respect to saving for retirement

Factors to Consider When Developing a Retirement Plan

When choosing a retirement plan, some important factors include the age at which one chooses to retire and the amount of money needed to live a comfortable life even after retiring (Finance Guru, 2021). Therefore, one should determine the various plans based on the period of maturity for the benefits. Additionally, it is crucial to determine other sources of income that will support your retirement period. For instance, one should consider having a pension and social security plan or other income sources like rental houses.

Another important consideration is the type of plan to undertake. It is crucial to compare the employer-sponsored plan, and the Individual Retirement Arrangements (IRAS) by checking the limits of both options based on the amount contributed towards the retirement plan (Finance Guru, 2021). The limits can be based on an individual’s number of dependents and marital status. As much as individuals save for retirement, they must balance between giving the family a comfortable lifestyle and saving for retirement. Determining the life expectancy of an individual is also a consideration when planning for retirement to ensure that one does not undertake a plan that will lead to money wastage, more so if they are deemed to have a short life span based on their health condition.

Relationship Between Risk and Return

There exists a relationship between risk and return in that when one takes greater risks, potential returns are also high. Consequently, low risk is associated with low potential returns. However, there are no guarantees that taking a high risk will result in a high potential since it may also result in a loss. Notably, retirement is delayed when no risks are involved, and savings are increased when social security pensions become riskier (Vliet & Koning, 2017). For instance, if the retirement and saving decisions are risky, individuals that are risk-vulnerable will save less due to higher pension risks, leading to ambiguity on retirement. Additionally, if retirement and saving decisions are made in tandem, higher pension risks may culminate in an earlier departure from the workforce or in the plummeting of precautionary savings, but both will never occur at the same time.

How Risk Factors Impact the Allocation of Assets

One risk factor is gender, which makes a difference in the retirement allocation of assets in the retirement plan. Notably, women have a longer life expectancy than men, which means they need more resources to support them for more years (Hertrich, 2018). Therefore, they are more likely to consider allocating assets for the long term, like in bonds and less on stocks. Lifestyle should also be considered in asset allocation. If an individual constantly buys cars, golfs a lot, travels often, and lives in a big house, they will need to allocate more assets to short-term but high risk and high return ventures like stocks and less on bonds.

Moreover, the stock market’s volatility can change the allocation of assets since more people go for bonds and other long-term investments like real estate rather than investing in stocks (Hertrich, 2018). When people are between 20 and 30 years, they are often advised to take out stock option portfolios for 60% and the other 40% in bonds (Gosse, 2019). Between 40 and 50 years, which are the peak earning periods and people have peaking financial commitment, some investors go for stability with increased investment in high-yield bonds rather than shorter-maturity bonds (Gosse, 2019). Beyond 60 years, most people have retired and need to have stability and cash to spend, hence balancing bonds and stocks.

How Fiscal and Monetary Policies May Impact Retirement Plans

Monetary policies are the actions of a federal reserve, central bank, or other monetary entities that manage interest rates and money supply to influence the economy. These policies can affect retirement plans through the general effect on the economy (International Monetary Fund [IMF], 2015). For instance, if interest rates are increased or decreased, the interest on the money market investments will also fluctuate, affecting an individual’s 401(k) plan. Though money market funds will culminate in higher returns due to increased interest rates, it is essential to remember that bond prices will fall when interest rates rise and vice versa. If an individual’s mutual fund in the 401(k) plan is an investment in bonds, an increase in interest rates will decrease net asset value and share price (IMF, 2015). Conversely, the income on these funds would increase in the long run due to the newly added holdings that pay higher rates to their portfolios.

Fiscal policies refer to the government taxation and spending decisions which influence the economy. A high level of government savings would lead to increased financial investment. Consequently, workers would be more productive, increasing their living standards due to increased wages and saving more as they prepare for retirement (IMF, 2015). However, savings decline due to the expansion of government programs that lead to reduced need to save, such as student loans, housing guarantees, workers’ compensation, unemployment insurance, Medicaid, Medicare, and Social Security. Lastly, through government implementation of policies that allow individuals to save more, like increasing the contribution limit towards the 401(k) plans, the retirement plans would be impacted (IMF, 2015).

Implications of the Time Value of Money With Respect to Saving for Retirement

The TVM is the notion that money today is worth more compared to the future based on its interest-earning potential. This concept is vital because it assists people in saving for retirement, and investors determine how to get the most out of their money (Zimmermann, 2022). TVM can be the disparity between retiring with anxiety because of not allocating enough retirement savings and retiring comfortably. Social security deductions may not entirely cover retiree living expenses; thus, the need to have other income sources. When an individual invests today, these investments can grow and be compounded over time. For instance, if one invests $10,000 in high-yield savings account with a 4% annual rate of interest, the account will have $10,400, meaning an additional 400. The earnings will continue to grow over time. Nevertheless, if an individual earned $10,000 a year later, they lost the chance to earn 4% interest or $400, which is the opportunity cost (Zimmermann, 2022). Hence, people should start their retirement plan early and start investing money so that they can earn value with time.


The importance of retirement planning cannot be downplayed. Some factors to consider when planning for retirement are the type of plan to undertake, number of dependents, marital status and life expectancy. When no other risks are involved, retirement is delayed, and savings are increased when social security pensions become riskier. Notably, fiscal and monetary policies affect retirement pans through interest rates, money supply, taxation, and government spending. It is also important to start retirement plans early due to the TVM.


Finance Guru, (2021). Financial Planning And Analysis For Future: Financial Planning For Retirement, Education, Life N Health. New York: Business & Economics

Gosse, A. G. (2019). Individual pension risk preference elicitation and collective asset allocation with heterogeneity. Journal of Banking & Finance, 101, 206-225,

Hertrich, C. (2018). Asset Allocation Considerations for Pension Insurance Funds: Theoretical Analysis and Empirical Evidence. Dordrecht: Springer.

International Monetary Fund, (2015). Fiscal Policy and Long-Term Growth. (2015).

Vliet, P., & Koning, J. (2017). High returns from low risk: A remarkable stock market paradox. Chichester, West Sussex, United Kingdom: Wiley

Zimmermann, S. (2022, May 9). Time Value of Money (TVM). Retrieved May 18, 2022, from


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