Is taking risks to improve your retirement worth it? How much risk are you willing to take? In this episode, John touches upon the pros and cons for taking risks with your retirement accounts. He discusses important considerations when trading in a retirement account, such as a Roth IRA. He explains that account size in isolation means nothing when it comes to the trading size relative to account size. This is because trade size should be based on things such as your net worth, trading objectives, skill level, and risk tolerance rather than the size your account.
Click here or in the video below to learn more!
During Fundamental In Trading or FIT training, we learn that a good rule of thumb is that high probability options trading should be reserved for about 20% of your net worth. This number is geared more towards someone who is older who is not willing to put everything on the line but may change drastically depending on your individual circumstances.
Taking on more risk?
You can certainly choose to trade with less or more than 20% of your net worth. This is a personal decision that depends on how much risk you are willing to take. Trading well below 20% of your net worth and your missing out on profits. But it also means you could literally lose your whole account and it won’t be that big of a deal. If you trade much more than 20% of your account, then you could be putting your current lifestyle on the line. Make sure you understand what your risks are to your net worth should your trades not go as planned.
There are two additional things to consider about retirement accounts: taxes and funding. For example, what happens when you lose already taxed money in a ROTH? Funding must be considered also. For example, if you lose $50,000, how long will it take you to replenish that money so that you can trade the same size again? Also, if you have no earned income you cannot fund some types of retirement accounts.
The Bottom Line
Taking risks to improve your retirement accounts can be greatly beneficial. The amount of money you put into it comes down to the type of person you are, the risks you are willing to take, and the flexibility you want with that money. If you are more interested in having that money on hand to invest and take risks, then it might be more beneficial to have money outside a retirement account. Pay attention to the kind of trader you are, and the amount of flexibility you want to have. It will help you form a better life and become a more successful trader!