Although most people make plans and prepare for their retirement, they may still face unexpected changes and risks. The longer their retirement is, the harder it is to maintain the adequacy of their assets. Therefore, it is necessary for them to be aware of different types of post-retirement financial risk and the ways to solve them.
There are four types of post-retirement financial risk: personal and family risks, healthcare and housing risks, financial risks, and public policy risks.
Different types of post-retirement financial risks
- personal and family risks
Personal and family risks include employment risk, longevity risk, death of a spouse, change in marital status, and unforeseen needs of family members.
Employment risk is the risk retirees face if they choose to work after their retirement. Sometimes, the ability and skill that retirees acquire are not suitable in job market, thus they are not able to get a job despite their experience and stability.
Longevity risk is the risk retirees face if they outlive their life expectancy and run out of money. Currently, more than 50% of retirees live longer than average life expectancy and some of them even live past age 100. Therefore, they should think clearly about their saving plan before they retire.
Death of a spouse and a change of marital status may be devasted to someone, leading to depression and even suicide. Meanwhile, from the financial aspect, retirees will suffer from financial difficulties in this case since some of them can no longer manage their finance and maintain their living standard.
Unforeseen needs of family members take place when retirees’ family members need help suddenly due to their change of employment, marital status or heath. Retirees need to give their family member financial assistance in order to help them get over the difficulties.
- Healthcare and housing risks
Healthcare and housing risks include unexpected medical bills, change in housing needs, and lack of caregivers.
Unexpected medical bills are very common among retirees. As they are growing older, their health status get worse and they need more healthcare. As a result, retirees will spend quite a lot on medical care and private health insurance.
Together with growing medical bills, retirees may need to move to retirement community if they health situation get worse and lose the capacity to take care of themselves. Living in a retirement community can be costly and they may wait a long time to move in.
Lack of caregivers happens when retirees fail to find an available facilities or caregivers. If one of the couple is sick and require high-level medical care, it is very likely for them to live separately, which will added both emotional and financial burdens on the other.
- Financial risks
Financial risks include inflation risk, interest rate risk, stock market risk, and business risk.
Inflation risk is very common but also deadly. Even a low rate of inflation can ruin retirees’ saving plan and let them suffer from financial difficulties.
Interest rate risk takes place when the rate goes up and down. If the interest rate decreases, retirees will get less retirement income and it is especially risky if they depend on their withdrawal each month. On the other hand, if the interest rate increases, bond prices will move the other way around, which will affect their disposable income.
Stock market loss can influence retirement saving significantly. Normally, the profit retirees can get from their stock portfolio is much lower than the one in long term. Meanwhile, different stock market performance will affect retirees’ retirement plan greatly later on.
Business risks refer to the one retirees face if the company they work for goes bankrupt. In this case, they may lose part of their pension income, especially when they choose a defined-contribution pension plan before.
- Public policy risks
Changes of government policy will lead to public policy risks. The most common one is the change of taxation.
How to avoid them?
To avoid personal and family risks, retirees can choose to retire later and take a part-time job after retirement. Meanwhile, it is always recommended to get enroll in a pension plan or purchases an annuity. Similarly, retirees should make good use of financial vehicles, such as life insurance and long-term care insurance to protect themselves in case any accident happens.
To avoid healthcare and housing risks, retirees need to live a healthy life, exercise regularly, and use preventive care in advance. Also, they can purchase long-term care insurance to cover part of the cost.
To avoid financial risk, retirees should spare their investment in equities, home, and TIPS to mitigate inflation.
To avoid public policy risks, retirees need to understand their rights and entitlements in order to get their benefits.