4 Financial and 4 Non-financial Risks In Retirement

Introduction

There is a huge psychological shift that occurs when people retire and often this is to do with the risks that they now face in retirement. When you retire, you are effectively giving up your future earnings capacity and you become reliant on the capital you have accumulated throughout your working life to provide you with an income.

It is therefore essential that you save enough and this is why it is important to work with a financial planner several years before you retire in order to ensure that you are on track for the retirement that you want.

Four Financial Risks in Retirement

Once retired there are four key financial risks that your accumulated wealth is exposed to.

Inflation

Your expenditure is likely to increase each year in line with inflation so it is important that, over the long term, the returns on your investments exceed inflation. Holding large sums in cash during retirement will likely see your purchasing power diminish.

The most reliable asset class to achieve an above-inflation rate of return over the long term is equities, however, you must be prepared to see fluctuations in the value of your portfolio. This short term volatility is the price you pay for long term performance. To try and mitigate some of this volatility you can include Bonds within the portfolio although this is likely to reduce overall performance.

Running Out of Money

We run our financial plans until age 99 and this helps us to see whether our clients will run out of money before they run out of life!

Running out of money at age 99 with an unencumbered property is not necessarily terrible especially if you have lived your best life. Chances are, many of us won’t even live to see age 99 anyway.

It would, however, be terrible if you ran out of money in your seventies and not being able to do the things you wanted to do.

This is why having a financial plan in place, reviewed regularly, is crucial so that you can balance your expenditure with the income being generated.

A Market Downturn

As we know, investment markets are volatile and during a retirement that could span 30 years or more there is bound to be market downturns from time to time. As such, any retirement strategy should hold a combination of cash to meet short-term income requirements as well as assets that can be left to generate a long term return.

Balancing a short term cash bucket and a longer term investment bucket is more of an art rather than a science and we would generally look to hold around two years’ worth of income in cash to weather any market fluctuations.

Often people will hold too much in cash and not generate the return they need. Also, when markets fall, the temptation is to sell down riskier assets which means people miss out on the returns when markets eventually recover.

It is therefore essential to have a coherent, well-diversified investment strategy and to stick to it over the long term.

Insufficient Liquidity

This risk is becoming increasingly common especially for those with buy-to-let properties. I have met with several clients who had purchased buy-to-let properties in order to generate additional income in retirement.

When these clients want access to cash, for example, to upgrade their main residence, pay for the expensive once-in-a-lifetime holiday or to help the children out financially, the liquidity isn’t there. You can’t sell a fraction of a property and selling a property can be time-consuming and expensive especially when you need the money quickly.

Clients also accept that increasingly the yields don’t look particularly attractive once tax, management fees and maintenance costs have been factored in.

Also clients don’t particularly like the hassle factor of having to deal with a buy-to-let property in retirement especially dealing with unruly tenants or having to arrange to fix a broken boiler in the middle of the night.

Factoring your capital requirements into your financial plan is important in determining how much money needs to be retained in cash and how much can be invested for longer-term returns.

It is also important to remember that, in the event that capital does need to be taken from longer term assets, investments in mutual funds can often be sold and the proceeds available within around seven working days.

Four Non-Financial Risks in Retirement

Having looked at the financial risks that, hopefully, can be addressed within a financial plan, it is important that we look at four key non-financial risks.

As financial planners, our discussions with clients are centred around their lifestyle and how their money can be used to ensure that they live their best lives.

This means that we often act as sounding boards for non-financial decisions albeit that many seemingly non-financial decisions can end up having a financial impact.

Lack of Purpose

This is often seen as a huge risk by those who have had successful careers and who are financially comfortable. There is an old adage in retirement planning that you should have sufficient money to sleep well at night and sufficient purpose to get up in the morning.

Having a purpose can be tricky to define and is different for each person. It could be simply spending more time with friends and family or it could be working part-time, mentoring or working as a consultant or non-executive director.

It makes sense to start thinking about what gives you purpose several years before retirement and then considering how this might fit in with your retirement plans.

Failing Health

Having accumulated sufficient capital and having created your ideal lifestyle, you would ideally want to spend as long as possible doing the things you want to do.

We can all probably think of people that we know who have had an issue with their health shortly after retiring.

It is important that we remain healthy both physically and mentally for as long as possible. As such, we may want to consider factoring in gym membership into our general expenditure. Alternatively, we might want to consider a full medical check-up each year to ensure that we remain in good health.

Lack of Connection

With our busy lives juggling work and family commitments, it is too easy to lose contact with old friends. Retaining a network of close friends is important for our general health and mental wellbeing but it takes time and effort.

Part of the retirement planning process should be to re-connect with old friends, to try and form new friendships and to meet up regularly. Having a good support network is especially important the older we get and becomes more important if we were to lose our spouse or partner.

Many of my successfully retired clients have extremely full social calendars meeting up regularly with family and friends.

Regrets Around Missed Opportunities

None of us know how long we will live for so it makes sense to try and do all of the things on our bucket list whilst we can. For most people, the years after they retire are going to be the most active and these will be the years to make the memories that they can look back fondly on in later life.

There is little point accumulating money and not taking the holiday of a lifetime or helping the children out financially when they most need it.

Having regular discussions with your financial planner about the things you want to do in retirement can help ensure that you don’t miss out on those things you wanted to do but kept putting off.

Conclusion

Retirement can appear to be daunting but having discussions with a trusted financial planner, ideally several years before retirement, can be crucial to helping you transition into a successful retirement. Having a financial plan in place along with a coherent, long term investment strategy can provide sufficient peace of mind so that you can focus on living your best life.