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NEWSLETTER                  FIRST QUARTER 2016

Managing the personalised risks of retirement


Retirees are fully aware of the abundance of financial risks that may adversely affect their retirement plans. Some of these risks relate to the macro-economic environment over which individually we have little control, like spiralling living costs and medical care expenses, the eroding of the purchasing power of one’s financial assets over time (inflation and weakening exchange rate), disappointing or below-par market returns, and lower-than-expected interest rates.


One can plan and manage for those risks by factoring in such dire scenarios in your planning; i.e. to ensure an adequate “margin of safety” in your retirement plan, if things go haywire. For example, using conservative return assumptions and not necessarily recent market returns (relatively high real returns) as the norm going forward. If the outcome of such “stress testing” indicates a thin margin of error it probably means one should work longer than you initially planned for and save more, unless you have viable backup plans to supplement retirement income. 


But macro-investment risks are not the only retirement risk one will endure, there are a number of other risks that can be categorised as personal, or if you fancy the more stylish term, idiosyncratic, which we all are potentially prone to, one way or the other. Personalised risks are to a certain extent more preventable than macro-risks, but not necessarily more manageable once manifested. In fact, the financial consequences thereof are probably much harsher in a retiree’s life than the effects of macro-economic risks. 


Personalised retirement risks include:


Health care needs – Healthcare expenses (medical aid premiums and expenses not covered in full by medical aid) tend to increase at a higher rate than consumer price inflation, the yardstick used to determine inflation in the economy. Interest rates and expectations are based on the latter, not medical inflation. Thus, it may become increasingly more challenging for retirees as they grow older to meet their ongoing medical expenses.


Outliving your retirement assets (longevity risk) – No one knows how long one will live, and while it is a blessing to live longer, it may come at a steep price, namely depleting and outliving your financial resources. Today people expect to live longer than previous generations because of huge medical advances, better lifestyles and healthier diets. Therefore, it is wise to plan beforehand for a longer post-retirement period than “normal” expectations. For example, in my retirement planning I use a post-retirement period of thirty years, although I have no specific reason to believe it should exceed the “normal” life expectancy of, say, fifteen to twenty years after retirement. 


Changes in marital status (death and divorce) – This may turn out catastrophic for the surviving spouse, especially if the deceased or separated spouse controlled and managed all the household finances. Ideally, spouses should communicate clearly and share their financial position. But based on my own personal experiences, it is much easier said than done – it is difficult to discuss issues with the other party if he or she is not really interested in finding out more or does not want to be taxed with the burden of “extra worries”. When such an event plays out, the “surviving” partner in the relationship is left stranded, if not bewildered what to do next. Knowledgeable, trustworthy friends and financial advisors often play an invaluable role in steadying the ship through these stormy waters.


Changes in housing needs – Retirees often scale down from their existing family home to a smaller dwelling, preferably a dwelling in a residential complex that offers security, meals, medical care and assistance, like retirement villages. But it comes at quite a price tag, and do not expect too much “change” from exchanging the larger family home for a small home in a retirement village. Clearly, it is not something that many retirees readily can afford. The latter group of retirees are dependent on the goodwill of friends and family to provide or arrange the necessary support as the ability to live independently declines over time. 



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Please note that all the material, opinions and views herein do not constitute investment advice, but are published primarily for information purposes. The author accepts no responsibility for investors using the information as investment advice. Please consult a registered investment advisor.


Unless otherwise stated, the author is the sole proprietor of this publication and its content. No quotations or references thereto are allowed without prior approval.     

Parents often act as the “financiers” of children’s unrealistic lifestyles, fantasies and “business schemes”.


At retirement day many people will have access to the largest pool of money they probably ever have dealt with in their lives. That dream car or holiday destinations becomes so much more a “reality”, although the same were never affordable during their working lives.


Budgeting is not only for accountants and financial managers, nor do you need such expertise.


Besides that retirees are becoming less attentive, others are desperately seeking high-yielding returns to meet the toll of rising living costs and fast-declining financial resources.

To keep all those falling balls in the air is a hard act to follow!

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