Retirement risk

Caveat: Below is a discussion concerning risk factors to consider for retirement. Many suggestions come from surveys, which can only represent general cases at best. Use this article as a guide. The best way to manage risk is to plan for every possibility (can it occur), regardless of the probability (will it occur). If applicable, planning should include a spouse or partner.

Deciding on a retirement age
When planning for retirement, one of the most critical decisions is the age at which the transition to the retirement phase will begin. Recently, retirement is coming earlier than many plan for due to the following:
 * Decline in personal health
 * The need to take care of a family member
 * Unexpected job loss (due to the economy), which can lead to a lower earning potential at the most critical phase of retirement savings - just before retirement.

Surveys suggest that most people have an expectation of retiring at the same age as their parents. There is also an expectation that the standard of living will be the same after retirement as during the working phase. Things have changed (defined contribution plans, which require investment management of assets and a recognition of mortality risks, have mostly supplanted defined benefit plans). There may be a nasty shock when the potential retiree realizes that the number of years left to accumulate retirement assets is less than planned; thereby forcing the need for increased savings.

Delaying retirement
There are financial advantages to delaying retirement. In 2007, and again in 2009, the Society of Actuaries asked retirees if their financial security would have increased by delaying retirement for 3 years. The most significant reason pre-retirees offered for delaying retirement is so they can continue receiving employer-provided health insurance; a significant benefit for those not yet eligible for Medicare. Other reasons for delaying retirement included:
 * Increasing the amount received from Social Security
 * Increasing the amount received from a defined benefit plan (pension)
 * Having 3 more years to make contributions to investments
 * Relying on your savings for a shorter period of time

The study found that pre-retirees were more likely than retirees to think that the factors listed above would increase their retirement security. In reality, financial security depends on individual factors. As detailed below, for actual retirees, working longer is not a popular choice.

It is also important for those who would like to work longer to plan realistically. Skills must be kept up-to-date and coworker networking must be maintained to keep pace in the workforce.

Retirement risk concerns
According to a survey by the Society of Actuaries (2009), the top risk concerns for retirees are:
 * Health care: Inadequate funds to pay for health care and long-term care (highest concern)
 * Income volatility: retirement income will vary with interest rate (highest concern - tied with health care)
 * Inflation: savings and investments may not keep up with inflation
 * Preserving the existing standard of living, including concerns to provide for a surviving spouse

Lesser concerns are for remaining in an existing home, providing for heirs, or being forced to rely on assistance from family members.

Managing financial risk
In this same 2009 survey, the most popular strategies to manage financial risk are:
 * Debt reduction; most notably the elimination of consumer debt and paying off the mortgage
 * Increase saving
 * Reduce spending

Asset management strategies are also utilized as retirees age. The most popular strategies are to move assets into more conservative investments and to invest a portion of assets into stock or stock mutual funds. Less popular strategies include investing in real estate, purchasing an annuity, or choosing an employer plan that provides guaranteed income for life. Very few retirees choose to reduce risk by delaying Social Security, moving to a less expensive home, or working longer.

Managing health risk
By far, the most utilized strategy retirees employ for managing health risk is to maintain a healthy lifestyle. Next in popularity is the purchase of health insurance to supplement Medicare or participate in an employer-sponsored retiree health plan.

Other strategies include:
 * Self-insuring: Saving for the possibility of large health expenses or long term care
 * Purchasing long-term care insurance
 * Arrangements with a continuing care retirement facility (less popular)

Application of risk management strategies
Risk management strategies start with identifying risk events that apply to a retiree's unique situation. Relying on survey data or other research is a good start. The retiree should understand that this information 1) may not apply to the retiree's situation and 2) may utilize different assumptions that can lead the retiree astray.

Then for each risk event, choose an appropriate risk management strategy and incorporate it into a retirement spending plan (see the sidebar on the right). Regardless if a risk is possible or not (can it occur), having a plan prepared in advance is time well spent when a low probability risk unexpectedly occurs in reality.

One technique to incorporate these events is to plan for a "risk-free" retirement. Then, extend the budget for each risk scenario. This can be done in a spreadsheet by adding columns for each scenario and copying the formulas across. Reduce each category by a percentage. For example, if one spouse is disabled, car expenses go to 50%.

Risk events

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 * +Risk Events That Apply to Both Pre- and Post-Retirement
 * - valign="top"
 * One or both spouses become disabled
 * One spouse passes away
 * }
 * }


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Pre-retirement risks affect your ability to save for retirement.
 * +Pre-retirement Risk Events
 * - valign="top"
 * Job loss
 * Health/medical crisis
 * Unanticipated expenses for children or parents
 * }


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INCOME RISKS SPENDING RISKS
 * +Post-retirement Risk Events
 * - valign="top"
 * width="50%" |
 * Living too long
 * Death-of-spouse induced loss of pension
 * High inflation
 * Financial market meltdowns
 * width="50%" |
 * Long-term care without insurance coverage
 * Unanticipated expenses for children or parents
 * }

Risk management strategies

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Caveat: The above investment recommendations (stocks, real estate, annuities, etc.) should be evaluated against your specific portfolio needs. If unsure, ask in the forum for advice.
 * +Strategies for Managing Financial Risks
 * - valign="top"
 * width="50%" |
 * Invest in stocks or stock mutual funds
 * Cut back on spending
 * Increase savings
 * Eliminate all consumer debt, such as by paying off credit cards and loans
 * Completely pay off your mortgage
 * Move assets to increasingly conservative investments as you get older
 * width="50%" |
 * Buy real estate or invest in property
 * Buy a product or choose an employer plan option that will provide you with guaranteed income for life
 * Work longer
 * Move to a smaller home or less expensive area
 * Postpone taking Social Security
 * colspan = "2"|
 * colspan = "2"|
 * }


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 * +Strategies for Managing Health Risks
 * - valign="top"
 * Maintain healthy lifestyle habits, such as a proper diet, regular exercise, and preventative care
 * Purchase health insurance to supplement Medicare or participate in an employer-sponsored retiree health plan
 * Buy long-term care insurance
 * Save specifically for the possibility of having large health expenses or needing long-term care
 * Move into or arrange for care through a continuing care retirement community
 * }
 * }

Society of Actuaries (SOA)
From the Society of Actuaries (SOA):
 * Post Retirement Needs and Risks. Research related to financial risks and needs after retirement
 * 2009 Retirement Risk Survey, the complete (full) 2009 report. Extracts are listed below.
 * Key Findings and Issues–Understanding and Managing the Risks of Retirement, 2009 report.
 * Retirement Planning Software and Post-Retirement Risks, 2009 report.
 * Key Findings and Issues–Process of Planning and Personal Risk Management PDF, 2009 report.