Do not go into retirement without addressing the risks

Retirement can be the most exciting and rewarding time of all, but, like any other stage in life, there are unique financial risks that need to be addressed. Longevity, inflation, health care needs, the death of a spouse, problems with living independently—all can affect a retiree’s quality of life. Changes in laws and social welfare programs can have dramatic effects on a retiree’s status, while changes in financial markets can affect income and legacy planning.

The Society of Actuaries might be the ideal organization to offer guidance on these risks, since actuaries by nature are professionals who analyze the financial consequences of risk for insurance companies, pension plans, health benefit systems and others. The Society recently issued a guide to managing 15 specific risks endemic to retirement.

A long, healthy life is the goal of many retirees but living long can also hurt the pocketbook. The Society notes that planning to live to one’s average life expectancy may be foolhardy since half of retirees will live longer than that. Guaranteed income streams such as Social Security, pensions, and annuities can help to ensure that a retiree doesn’t run out of income, no matter how long he lives. However, annuities (contracts offered by insurers to pay lifetime income) have disadvantages: if the payment is fixed, it may not keep up with inflation, and the principal spent to buy an annuity is no longer available for immediate use. The Society notes that retirees can buy annuities at any time, and need not put all of their money into them at once. Another alternative is a reverse mortgage, which allows the retiree to get an income stream in exchange for giving up some of the equity in a home.

Inflation is a serious and never-ending concern. It is pretty likely that goods and services will go up in price over time. Although inflation recently has been running at a low rate, we have experienced inflation of greater than 10 percent a year in five years since 1947. Investing a portion of your assets in common stocks and inflation-indexed U.S. Treasury securities can help to keep up with inflation, although the trade-off is the assumption of short-term market risk, the Society says. Also, retirees who delay taking Social Security can increase the value of the inflation-indexed income they will receive once they claim it.

Retirees have been hit hard in recent years by plummeting interest rates. It has reduced their income from bonds and bank accounts while making the purchase of fixed annuities less attractive. If rates start rising, they will hurt those retirees who have variable rate loans or long-term bonds, it adds. Current rates make it apparent that retirees cannot rely on fixed-rate investments as their only source of income, the Society says. Dividend-paying stocks may be one alternative, although such investments bring volatility along with the ability to earn rising income.

The Society offers its guide on the internet. It is available on the organization’s web site,