The American College’s RICP® curriculum includes a list of 27 risks that retirees face. 27! I discuss this list regularly with clients to help them understand how important this phase of their planning is, and also to pinpoint a few risks that are incredibly important but often overlooked. Beyond basics like market risk and interest rate risk, here are a few that you may find valuable:
Longevity risk – Medical advances are leading to longer lifespans. This is probably no surprise to you, but I would like you to consider a new twist on this growing challenge. When retirees live longer lives, not only do they run a greater risk of depleting their assets, they can lose perspective about time itself. This can have a significant impact in the realm of behavioral economics. Specifically, the decisions they make early in retirement may not have immediate consequences. A bad choice in the first year of retirement may not show its effects in year two. But over many years, the outcomes of their decisions compound, either positively or negatively.
A lifestyle choice can feel good for a few years but cause significant harm as the years pass. Therefore, the risk of living long in retirement needs to be considered in more ways than just asset allocation.
Overspending on a new home in a tennis community hundreds of miles from family feels great until one spouse is confined to a wheelchair without extended family nearby to lend a helping hand.
Frailty risk – Are you a practitioner of the systematic withdrawal income planning strategy? When administered correctly, this requires an annual (or more frequent) adjustment of the client’s spending to reflect the safe withdrawal rate their portfolio can support. What happens when the client ages, slows down, and is unable to respond to phone calls or visit you in your office to make those adjustments? Worse yet, what if they lose their decision-making abilities altogether? Their need for income and care hasn’t diminished, but they’re unable to work closely with you.
This risk of the client’s age-related frailty can have meaningful consequences for your ability to serve their needs if you have chosen a complex income strategy for them. This may warrant a discussion about guaranteed income strategies that will help provide needed income, even when the client isn’t as healthy as they were when they began their income plan.
Forced retirement risk – Your client plans to work until age 66 in order to reach full retirement age with Social Security benefits. Unfortunately, a personal health issue forces them to retire at 61. Are they financially prepared to support the lifestyle to which they’ve grown accustomed? How will you adjust their planning to respond to this change? Are their assets positioned in such a way that they have adequate liquidity to meet their needs or will they be forced to tap into assets at a cost to them?
A big emergency fund may not generate attractive yields, but the peace of mind it provides can help turn an unexpected retirement into a blessing. Loss of spouse risk – What happens to the family income when a death occurs? Oftentimes, you’ll hear that retirees don’t need life insurance. After all, they have enough assets to retire, so they’re self-insured, right? Not so fast. It is imperative to evaluate survivor benefits in pensions and Social Security.
What may feel like a comfortable retirement can become downright terrifying upon the death of a spouse. Income sources are often halved, yet lifestyle costs for the widow remain very similar to those of a couple.