According to pension experts, longevity risk refers to the risk that a retiree can live longer than is currently expected.
Locally, before the launch of the pre-retirement education programmes by the Retirement Benefits Authority (RBA), the majority of employees were living for barely five years upon leaving work.
This was attributed to lack of awareness on preparedness financially and psychologically.
Months ago at a pre-retirement workshop in the city, a participant posed a question that confused many people. Barely two years away from retiring, he asked: “How will I survive financially if I live for another two decades upon retiring at 60 years”?
The question highlighted some of the post-retirement risks people face but are least prepared for. While some are trained in how to cope after retirement, many are oblivious of the risks they are exposed to after leaving employment.
Some of these risks:
LONGEVITY RISK
According to pension experts, longevity risk refers to the risk that a retiree can live longer than is currently expected. Locally, before the launch of the pre-retirement education programmes by the Retirement Benefits Authority (RBA), the majority of employees were living for barely five years upon leaving work. This was attributed to lack of awareness on preparedness financially and psychologically.
With the increased preparedness, advancement in medical care, vast knowledge in nutrition and dieting coupled with rollout of innovative post retirement medical cover products, many people tend to live longer upon retirement relative to what it was a decade ago.
Whilst this is a good thing to smile about, this longevity risk is already posing stress to the majority of employees heading to retirement. This is because prolonged life requires proper financial planning and lots of resources in terms of pensions and retirement benefits.
In many cases the resources mobilized by the employees aren’t enough to cater for their financial needs in terms of upkeep and medical care. To cater for the longevity risk, employees need to purchase annuity that would guarantee uninterrupted monthly incomes until death.
An annuity is a financial product offered by insurance companies that gives you a guaranteed income for the rest of your life or for a fixed amount of time.
If you purchase an annuity, as a beneficiary you receive a monthly payment based on your investment but the annuity stops making payments when you die.
So upon attaining retirement age, whether formerly employed or not, one should purchase an annuity to be guaranteed of monthly income into the unforeseeable future.
HEALTH RISK
With age, the human immune system becomes less effective at tackling infections and less responsive to diseases. This explains why the majority of people develop health conditions as they advance in age. The strongest known risk factor for chronic conditions or illnesses such as dementia is increasing age.
To cater for the health risks in retirement, retirees should purchase medical covers to cover for medical bills without having to dispose of their assets.
Today there are many local insurance companies that have rolled out post-retirement medical covers that offer both inpatient and outpatient services besides last expense upto the age of 85 years.
Prior to the roll out of post-retirement medical cover, it was a challenge for persons over 65years to secure medical covers from insurance companies as most of them were regarded as full of health risk due to the underlying conditions associated with old age.
INFLATION RISK
Whilst majority of retirees focus on saving to fend for their life in retirement, little emphasis is given on how to safeguard the benefits from inflation risks. Inflation impacts on the cost of goods and services which erodes the purchasing power as time passes.
To safeguard retirement benefits from inflation risks, retirees should purchase inflation-linked annuity that increase either by 3percent or 5percent every anniversary of the policy.
The downside of this type of annuity is that the payable income is significantly lower compared to fixed annuity which is exposed to inflation risks.
Non inflation linked annuity also known as non-escalating annuity pays fixed incomes during the entire period of the policy.
Alternatively, the retirees can also diversify into investments such as stocks and real estate that post higher returns above the inflation rate to hedge against inflation risks.
LIQUIDITY RISK
Life in retirement may sometimes force you to cater for unplanned expenses or uncertainties such as car repair, accidents or purchase of medical cover that may not be fully covered by your monthly annuity incomes.
Having all your benefits in illiquid assets such as land upon retirement will mean that every time you encounter such emergencies that require cash, you will have to engage in unplanned sale of your assets.
This may lead into loss as you will be selling at a desperate price to urgently meet your cash needs.
Conversely, having all your benefits in liquid assets may lead to reckless spending and loss of potential investment returns. To stay safe from such liquidity risk, you require proper portfolio allocation and management.
This portfolio allocation and management require you putting benefits into three major buckets; cash, income and growth.
The cash budget caters for “now’’ cash needs, income bucket targets “soon needs” while that one for growth addresses “later needs”.
The “now needs” are your immediate cash needs, “soon needs” are those cash needs that you need to meet in the next 3 to 5 years whereas “soon needs” are those that come in the next 5 years.
The cash budget should be invested in liquid assets such as money market and fixed deposits. Income budget can be invested in bonds whereas a growth bucket should be invested in capital growth assets such as land and assets.
INVESTMENT RISK
The quest to earn higher returns to fend for life in post retirement has pushed many retirees into unplanned investment ventures.
Due to limited knowledge and failure to undertake proper due diligence, many have lost their hard earned benefits in unregulated and fraudulent investment scams and ventures.
Sometimes investment losses also occur in regulated investments due to lack of knowledge and proper planning in terms of risk tolerance and returns.
To stay safe, retirees are advised to fully understand their risk tolerance, risks and returns before investing.
With the rise of investment scams, retirees should put money only in regulated instruments.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
