How to prepare for the risks of retirement

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How to prepare for the risks of retirement


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Summary

  • According to pension experts, longevity risk refers to the risk that a retiree may live longer than is currently expected.
  • At the local level, before the Pension Authority (RBA) initiated pre-retirement training programs, most employees had been living for just five years after leaving their jobs.
  • This has been attributed to a lack of awareness of financial and psychological readiness.

Months ago, in an early retirement workshop in the city, a participant asked a question that confused many people. Just two years after retirement, he asked, “How will I survive financially if I live for another two decades after retiring at 60”?

The question highlighted some of the post-retirement risks people face but are less prepared for. While some are trained on how to cope with retirement, many are oblivious to the risks they face after leaving their jobs.

Some of these risks:

LONGEVITY RISKS

According to pension experts, longevity risk refers to the risk that a retiree may live longer than is currently expected. At the local level, before the Pension Authority (RBA) initiated pre-retirement training programs, most employees had been living for just five years after leaving their jobs. This has been attributed to a lack of awareness of financial and psychological readiness.

With greater preparedness, advancement in medical care, extensive knowledge in nutrition and diet along with the launch of innovative post-retirement medical coverage products, many people tend to live longer after retirement than they did a decade ago. .

While that’s a good thing to smile about, this longevity risk is already putting a strain on most employees heading for retirement. This is because a prolonged life requires adequate financial planning and a lot of resources in terms of pensions and retirement benefits.

In many cases, the resources mobilized by employees are not sufficient to meet their financial needs in terms of maintenance and medical assistance. To meet the longevity risk, employees must purchase an annuity that guarantees uninterrupted monthly income until death.

An annuity is a financial product offered by insurance companies that gives you a guaranteed income for the rest of your life or for a fixed period of time.

If you buy an annuity, you as a beneficiary receive a monthly payment based on your investment but the annuity stops making payments when you die.

So when you reach retirement age, whether you are already employed or not, you should buy an annuity to ensure a monthly income in the unpredictable future.

HEALTH RISK

With age, the human immune system becomes less effective at dealing with infections and less susceptible to disease. This explains why most people develop health conditions as they age. The strongest known risk factor for chronic conditions or diseases such as dementia is increasing age.

To cope with health risks in retirement, retirees should purchase medical coverage to cover medical expenses without having to dispose of their assets.

Today there are many local insurance companies that have implemented post-retirement medical coverage that offer both inpatient and outpatient services in addition to the last expense up to the age of 85.

Prior to the introduction of post-retirement medical coverage, it was a challenge for people over the age of 65 to secure medical coverage from insurance companies as most of them were considered fraught with health risks due to the underlying conditions associated with them. to old age.

RISK OF INFLATION

While most retirees focus on saving to provide for their retirement lives, little emphasis is placed on how to safeguard the benefits from the risks of inflation. Inflation has an impact on the cost of goods and services that erodes purchasing power over time.

To safeguard retirement benefits from inflation risks, retirees should purchase inflation-related annuities that increase by 3% or 5% each year the policy is valid.

The disadvantage of this type of annuity is that the payable income is significantly lower than the fixed annuity which is exposed to inflation risks.

The non-inflation-linked annuity also known as the non-rising annuity pays fixed income over the entire period of the policy.

Alternatively, retirees can also diversify into investments such as stocks and real estate that perform above the inflation rate to protect themselves from inflation risks.

LIQUIDITY RISK

Life in retirement can sometimes force you to cope with unplanned expenses or uncertainties such as car repairs, accidents, or purchasing medical coverage that may not be fully covered by your monthly annuity income.

Having all your benefits in illiquid assets such as land upon retirement will mean that whenever you encounter such cash-requiring emergencies, you will have to engage in an unscheduled sale of your assets.

This can result in a loss as you will be selling at a desperate price to urgently meet your cash needs.

Conversely, having all your advantages in liquid assets can lead to reckless expenses and the loss of potential investment returns. To stay safe from such liquidity risk, proper portfolio allocation and management is required.

This portfolio allocation and management requires that you put the benefits into three main categories; liquidity, income and growth.

The cash budget meets “immediate” cash needs, the income bracket caters to “short-term needs”, while the growth budget caters to “subsequent needs”.

The “immediate needs” are your immediate cash needs, the “short needs” are those cash needs that you have to meet in the next 3-5 years, while the “short needs” are those that will come in the next 5 years.

The cash budget should be invested in liquid assets such as the money market and fixed deposits. The income budget can be invested in bonds, while a growth segment should be invested in capital growth assets such as land and assets.

INVESTMENT RISKS

The quest for higher returns to survive after retirement has pushed many retirees into unplanned investment ventures.

Due to limited knowledge and the inability to undertake proper due diligence, many have lost their hard-earned money in scams and unregulated and fraudulent investment ventures.

Investment losses sometimes occur even in regulated investments due to lack of knowledge and proper planning in terms of risk tolerance and returns.

To stay on the safe side, retirees are advised to fully understand their risk tolerance, risks and rewards before investing.

With the rise in investment scams, retirees should only invest money in regulated instruments.

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