Friday, May 18, 2012

An Inventory of Post-retirement Risks

9:39 AM

Looking for a good list

The Society of Actuaries has done a lot of work in recent years exploring post-retirement risks. Among their many excellent publications is “Managing Post-Retirement Risks – A Guide to Retirement Planning”. In there you will find a shopping list of risks providing for each some background information, an assessment of predictability and risk management approaches.

You will find this and many other interesting publciations on the Society of Actuaries Website:

Post-Retirement Needs and Risks

Our list has many in common with the SOA list, plus a few others that I feel are important and need their own consideration. For completeness, I didn’t drop any from the SOA list, although some may not be relevant for most.

Having a list is a good starting point for our risk management methodology. We can then prioritize each risk, quantify its likelihood and evaluate the consequences as they apply to our own situation.

Risks defined

So let’s go through our inventory of risks.

Longevity risk

"Longevity: The Underlying Driver of Retirement Risk" – Society of Actuaries

This is the risk you want to incur!

Longevity risk is the risk that retirement assets eventually become insufficient to provide the income we need to pay expenses for as long as we live.

All other risks exist because of the longevity risk. Stock market, sequence of returns and interest rate risks don’t matter if longevity wasn’t the goal. We need better returns to have enough money for the long haul and in the process become exposed to uncertain and volatile equity returns or fixed investments returns that fall below expectations.

Interest rate risk

The risk of low earnings or reduced market value of a portfolio due to low future interest rates.

Sequence of returns risk

The risk that just before or after retirement a market downturn will reduce the capital base, not leaving enough time to recover losses when income is being drawn. This means the portfolio runs out of money much sooner than if there had been no market downturn.

This combination of poor or negative returns with account withdrawals at the onset of retirement can rapidly deplete a portfolio, leaving insufficient funds invested to make up losses in future years.

Stock Market risk

The risk of the decrease in the market value of an investment.

Inflation risk

The risk of loss of purchasing power due to the increase in costs over time due to rising prices.

Loss of spouse risk

The risk of adverse financial consequences caused by the death of a spouse.

Declining health risk

The risk of increased need for assisted care because of declining health in old age.

Medical costs risk

The risk of increased medical-related expenses in old age.

Employment risk

The risk of loss of supplemental income by working part-time or full-time while retired.

Unforeseen expenses risk    

The risk of the adverse financial consequences of unforeseen expenses.

Estate preservation risk

The risk of the reduced value of the estate due to depletion or taxation on bequest.

Systemic risk ("Black swan")

The risk of a pronounced secular downturn in the economy and in capital markets.

Liquidity risk

The risk of not having funds available or having illiquid funds for unforeseen expenses.

Business risk

The risk of the cessation of operations of a financial institution and the adverse impact on insurance or investment products owned by the individual.

Risk of bad advice, fraud or theft

The risk of loss resulting from purchasing products or investments that are unsuitable or investing funds in a fraudulent operation.

Public policy risk

The risk of unforeseen increases in personal income tax or reductions in government pensions or health care benefits.

Other risks noted in the Society of Actuaries document

  • Lack of Available Facilities or Caregivers
  • Loss of Ability to Live Independently
  • Change in Housing Needs
  • Other Change in Marital Status
  • Unforeseen Needs of Family Members

What's next

Defining each risk is the first step for formulating a risk management strategy. In future posts, we will expand on these risks with the aim of finding ways to deal with each of them using one or more of the four risk management approaches at our disposal: avoidance, reduction, transfer or retention.


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