An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk

by Allison Schrager

The annuity price helps you gauge how much risk you can bear or need to take in the market. Suppose of that $70,000, you estimate you need $50,000 a year for necessities, such as your car or your home, and $20,000 for more discretionary expenses, such as travel and eating out. It makes sense to invest about 30 percent of your retirement money in something risky, to finance the $20,000 in discretionary expenses and invest the rest in risk-free assets, such as long-term bonds or an annuity. This strategy ensures you can meet all your necessary expenses no matter what happens to the market and still offers some reward on what you can risk. The conversation you need to have with your financial planner concerning retirement is not how you feel about risk; instead, you should talk about how much income you can gamble. This type of discussion not only helps you plan for retirement but also changes the way you invest and approach risk.