by D. Victor

Created on: February 14, 2010   Last Updated: June 17, 2010

For some retirees, retirement is an era of hope and fulfilment. For others, it is a minefield, littered with risks and pitfalls. The difference between the two groups is that one manages the risks of retirement far better than the other does. After all, risks are an inherent aspect of life; how we choose to manage it matters. Indeed, none of the retirement pitfalls is insurmountable. When doing retirement planning, you should consider the potential or inherent risks associated with it.

Longevity risk

Longevity risk is a fancy way to define the risk of outliving your savings. Particularly when retirees fail to plan properly, they find themselves scraping the bottom of the proverbial barrel before their 10th year of retirement. Increased life expectancies are also placing an additional burden on retirees' nest egg. With inadequate nest eggs, other risks of retirement and longer retirement periods, longevity risk will be the most significant retirement challenge we face.
 
Market risk

Trying to save or invest in the financial market has attendant risks, particularly retirees—who face shorter investment horizons. As we saw with purchasing power/inflation risk and longevity risk, retirees need to have some capital growth to sustain their standard of living throughout potentially longer retirement periods. Even retirees who are annuity investors are exposed to market risk to an extent, especially where variable annuities are concerned. In difficult or uncertain economic circumstances, retirees may not be certain about retirement fund allocations. Managing market risk is about balance and comfort—portfolio diversification and risk tolerance.

Purchasing power risk

With inflation being the norm and taxation being a financial reality, retirement income—particularly fixed retirement income—loses value precipitously over time. The concern to retirees is the loss of real value of savings and income in retirement. Apart from being an inherent burden, this poses a dilemma to retirees in terms of how much risk to take when investing. Having an ultra-conservative portfolio exposed the retiree to purchasing power risk more while investing more aggressively increases the market risk.

Health risks

As we become older, we become increasingly prone to illness, especially critical illness. You should note how many health insurers stop medical coverage for seniors once they cross a certain age—usually around 70. Huge medical bills and poor health combine to wipe the sheen off your golden years and make a dent in your standard of living. WIth health, prevention is far better than cure. Thanks to the availability of books on healthy living, you can get a headstart in living a healthy and productive retirement. It is in your hands.

Conclusion

The good news is that no retirement risk is insurmountable. Prudence, proper planning and living within your means are ways to ensure that you do not descend into poverty during your golden years. We are designed to overcome obstacles, or at least withstand many. Retirement risks are like potholes on the road—you can skilfully avoid them, allow them to give you a rough ride or have them derail you. Ultimately, it is your choice.

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