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Manage risk, and investor quirks, decade by decade

When managing risk across clients' entire life spans, financial advisors have observed some common customer mind-sets — and associated risks — within each specific decade of life.

20s risk: Not understanding. "What I experience more than anything with this age group is that they graduate from college with absolutely no clue about personal finances," said Rich Colarossi, certified financial planner with Colarossi & Williams.

People in their 20s are coming up in a very difficult time, he added. They need financial mentoring because they're not financially literate.

Father and son
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"They're asking, 'What's withholding? What's a mutual fund?' And they don't have any confidence in the system," Colarossi said. "There's a lot going on, and it's too difficult for them to commit.

"But we need to make them understand the benefits of an investment program," he added. The first risk, Colarossi said, is that many 20-somethings are not participating in the market. The second is that they are dealing with many time horizons.

Despite conventional wisdom, time is not on 20-somethings' side, he said. While they may have a small portion of their portfolio going to a retirement account, most of their portfolio is not "set it and forget it."

Because there are so many potential life events coming up within about five years for people in their 20s — weddings, graduate school, kids — there is a lot of short-term risk to be managed for this age group, Colarossi said.

30s risk: Not planning. Because one's 30s are a time for having children, buying a first home and being grounded in a career, it is the decade of truly beginning financial planning, according to Rick Kahler, CFP and owner of Kahler Financial Group.

"It's a time when savings absolutely has to happen," he said.

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Kahler recommends parents at this age establish two emergency funds for:

  1. Known and unknown future expenses, such as deductibles, accidents and things breaking down.
  2. Job loss in case of an extended layoff, saving six to 12 months' worth of living expenses.

These funds should be 100 percent safe, he said, and seen not as an investment but rather insurance accounts. Meanwhile, retirement accounts should be heavily into equity or equity-like instruments and broadly diversified.

"This is a good decade to do some internal exploration of your relationship with money," Kahler said. "If this saving doesn't happen within one year of hitting 30, then there's a problem.

"This needs to happen at the beginning of your career, before you get addicted to a lifestyle that you can't sustain."

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40s risk: Not taking stock. "The 40s is a time to figure out the different pieces that could present a risk to a client's long-term plan," said Avani Ramnani, CFP and director of financial planning and wealth management with Francis Financial.

Along with growing family responsibilities (including college), clients are often experiencing career transitions, she said, whether stepping up significantly in a current vocation, changing careers or starting a business.

Other gauges of risk include the client's health, life expectancy, stress levels, hobbies and type of work done, Ramnani said. This is also when the "sandwich situation" — simultaneously having to support both your parents and your own children — starts to show up

"We look at all these different perspectives, to see their impact on the client's portfolio, and determine where stability is needed," she said.

This age group needs to balance a short-term portion of their portfolios (six- or seven-year time horizon, middle-of-the-road risk) with a more aggressive, long-term retirement portion, Ramnani said.

Another question also comes up during this decade: Do we save for retirement or for our children's' education?

"Think about it this way: Your children will get a loan for their education, but no one is going to loan you money in retirement," said Ramnani.

"We need to be more conservative with their risk because if they lose money, it will hurt them more. The response is to educate them because they often have an inability to see the future." -Beth Blecker, CEO of Eastern Planning

50s risk: Not looking. "The decade of [your] 50s is complicated because there are different 50s," said Beth Blecker, CEO of Eastern Planning. "There's no longer a standard formula."

For example, she said, individuals with pensions, looking forward to Social Security, have a greater ability to handle risk. Similarly, people with a lot of assets can also handle more risk, but frequently don't feel the need to do so.

However, those at the other end of the spectrum — who have difficulty saving — have a dilemma.

"We need to be more conservative with their risk because if they lose money, it will hurt them more," Blecker said. "The response is to educate them, because they often have an inability to see the future.

"They need to develop the ability to understand investing and see where they'll be in 10 years, using goals and budgets."

The biggest problem with people in their 50s, said Blecker, is that they don't look at their retirement accounts. "They don't know if they measure up to their risk tolerance," she said. "If they look at them, they don't analyze them.

"No one is explaining to them the risk or volatility in their accounts."

60s risk: Not optimizing

"In your 60s, it's becoming more real," said Herb White, CFP and president of Life Certain Wealth Strategies. He described a number of risks that apply to clients in this decade of life:

  • Market risk: This is always present.
  • Performance orientation instead of goal orientation: Pre-retirees need to be able to achieve their personal goals with the least amount of market risk.
  • Tax efficiency risk: For people in their 60s, it's not how much you make, but how much you keep. For example, a bond could be safe, but you need to consider the type of account it is held in. If it's in a regular brokerage account, it will be taxed as ordinary income.
  • Interconnectivity risk: Be wary of the impact of one part of the portfolio on others. Social Security, pensions and annuities are all interconnected.
  • Legislative risk: For example, in 2014 a law was passed allowing existing pensions to be reduced. It's important to anticipate what else could go wrong legislatively.
  • Longevity risk: Could people outlive their money?
  • Time window risk: This age group has less time to recover from unexpected life changes, such as divorce, illness, etc.

— By Deborah Nason, special to CNBC.com

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