Risks facing retirees

Risks facing retirees

When it comes to retiring, a number of risks are specific to the retirement life stage.

These are the most common financial risks that retirees face.

1. Investment risk

The possibility of lower than expected returns affecting the level of retirement savings and future income generated.

If retirees are too conservative and do not invest to grow a portion of their retirement capital then they face the risk of withdrawing more than they earn and may result in having to rely on other income sources such as the age pension sooner.

2. Inflation risk

The possibility of high inflation, which increases the cost of living and forces retirees to spend more of their capital than expected.

It’s vital that income is designed to keep pace with inflation to ensure retirees can continue to meet rising costs. Past inflation data can provide some help in estimating retirement needs, but there is no guarantee that future inflation will match historical experience.

Overspending is just one of the common mistakes retirees can make.

Many investors try to own some assets whose value may grow in times of inflation. However, this sometimes results in trading inflation risk for investment risk.

3. Sequencing risk

Also referred to as timing risk. This is the possibility of negative returns at or near retirement affecting the market value of investments, which cannot be recouped because of the requirement to draw down to fund living costs.

More recently, the Global Financial Crisis (GFC) put strain on many people planning retirement as the market downturn reduced their superannuation savings and retirement capital. This also meant that some retirees were faced with the necessity to delay retirement, transition to retirement by working part time, or reducing their retirement income expectations.

4. Expenditure risk

The possibility of unplanned costs and lump sum expenses in retirement, which reduce retirement savings and future income levels.

Unplanned costs can easily arise in retirement – this highlights the importance of having a buffer and some cash savings set aside in the case of emergencies. Overspending is just one of the common mistakes retirees can make. Here are some others.

5. Legislative risk

Changing social security, taxation and superannuation legislation.

With changing governments comes changes to legislation. This can sometimes represent uncertainty for retirees and pre-retirees, but illustrates the need for the regular review of a retiree’s financial plan to ensure appropriate strategies are in place to manage tax, income and eligibility for social security and associated concessions.

6. Longevity risk

The possibility of running out of money due to living longer than expected.

This is potentially the biggest risk facing retirees. Many retirees use life-expectancy figures to plan how long their money may last. Unfortunately no one has a crystal ball when it comes to how long they may need their capital to last and these figures are just an average at retirement. You may end up surviving well past your life expectancy and even end up doing triathlons in your 90s, like this guy!

On average, women live longer than men and wives outlive husbands in most cases. Longevity has increased over time. Any medical breakthroughs could bring additional improvement.

In theory, retirees want to make sure their money will last a lifetime without cutting back on expenditures or reducing their standard of living.

Joy M Smith, Principal, Segue Financial Services Pty Ltd