The most careful plans and preparation for retirement can fall apart due to any number of post-retirement risks: an unexpected death, a lengthy illness, a stock market crash, or a pension plan that goes bankrupt. In addition, it is not unusual for people to live more than 30 years in retirement, due to increased incentives to quit early and rising life expectancy, which in itself presents a major risk that retirees will outlive their savings.
The Society of Actuaries (SOA) in the United States has identified a number of post-retirement risks that can affect income. They’re grouped into four categories. People preparing for retirement—or already in retirement—should consider them carefully.
“There are many unexpected demands for a retiree’s funds," says Peter J. Creedon, CFP®, ChFC, CLU, chief executive officer, Crystal Brook Advisors, New York, N.Y. "For that exact reason, everyone needs a realistic emergency fund."
Many retirees plan to supplement their income by working either part-time or full-time during retirement. In fact, some organizations prefer to hire older workers because of their stability and life experience. However, success in the job market may also depend on technical skills that retirees cannot easily gain or maintain.
Running out of money before they die is one of the primary concerns of most retirees. Longevity risk is an even larger concern today, as life expectancy has risen. The life expectancy at retirement is just an average age, with about half of retirees living longer and a few living past age 100.1
Death of a Spouse
Grief over a spouse’s death or terminal illness contributes to high rates of depression and suicide among the elderly.2 Then there’s the financial impact: A spouse’s death can lead to a reduction in pension benefits or bring additional financial burdens, including lingering medical bills and debts. Also, the surviving spouse may not be able or willing to manage the finances if they were usually handled by the deceased.
Change in Marital Status
Divorce or the separation of a cohabiting couple can create major financial problems for both parties. It can affect benefit entitlement under public and private retirement plans, as well as individuals’ disposable income.
Unforeseen Needs of Family Members
Many retirees find themselves helping other family members, including parents, children, grandchildren, and siblings. A change in the health, employment, or marital status of any of them could require greater personal or financial support from the retiree for that individual. Examples of financial assistance include paying healthcare costs for an elderly parent, paying higher-education fees for children, or providing short-term financial assistance to adult children in the event of unemployment, divorce, or other financial adversities.
Unexpected Medical Bills
These are a major concern for many retirees. Prescription drugs are a major issue, especially for the chronically ill. Older people usually have greater healthcare needs and may require frequent treatment for a number of different health-related issues. Medicare is the primary source of coverage for health care services for many retirees. Private health insurance is also available, but it can be costly.
Change in Housing Needs
Retirees may need to change from living on their own to other forms of housing, such as assisted living or independent living in a retirement community, which combines some assistance with housing. These residences can be quite costly, and the most appropriate form of housing for an individual in a given situation may not be available in the chosen geographic area or may have a long wait for entrance.
Lack of Caregivers
Facilities or caregivers are sometimes not available for acute or long-term care, even for individuals who can pay for it. Couples may be unable to live together when one of them needs a higher level of care. For people who have lived together for decades, this can result not only in increased costs but in emotional stress.
Inflation should be an ongoing concern for anyone living on a fixed income. Even low rates of inflation can seriously erode the well-being of retirees who live for many years. A period of unexpectedly high inflation can be devastating.
Interest Rate Risk
Lower interest rates reduce retirement income by lowering growth rates for savings accounts and assets. As a result, individuals may need to save more in order to accumulate adequate retirement funds. Annuities yield less income when long-term interest rates at the time of purchase are low. Low real interest rates will also cause purchasing power to erode more quickly.
Stock Market Risk
Stock market losses can seriously reduce retirement savings. Common stocks have substantially outperformed other investments over time and thus are usually recommended for retirees as part of a balanced asset allocation strategy. However, the rate of return that you earn from your stock portfolio can be significantly lower than the long-term trends. Stock market losses can seriously reduce one’s retirement savings if the market value of your portfolio falls.
Loss of pension plan funds can occur if the employer that sponsors the pension plan goes bankrupt or the insurer that is providing annuities becomes insolvent. There are guarantees for private pension plans under the Pension Benefit Guarantee Corporation (PBGC) that could protect some of your pension income, but maybe not all of it.3
Public Policy Risks
Government policies affect many aspects of our lives, including the financial position of retirees, and these policies often change over time. Policy risks include possible increases in taxes or reductions in entitlement benefits from Medicare or Social Security.
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