5 retirement risks everyone should keep in mind

A key element of retirement planning is to understand the potential risks that can affect your retirement nest egg - so that you can invest accordingly. Here’s a guide.

Ideally, retirement planning should be a long-term, planned process. By understanding the risks you may face when saving for retirement, you can take advance measures to help ensure financial security once you’ve stopped earning a salary. We look at some of these risks below.

1. Running out of retirement savings due to longevity

The fact that people are living longer, thanks to healthier lifestyles and medical advances, is a global trend. While this is positive, it has shifted the goal posts for retirement planning. The likelihood of extended years of retirement means investors need to find additional financial resources to see them through this period.

When planning around longevity, it is crucial to consider the elevated levels of medical care and costs (see inflation below), and ensuring that the income you draw during retirement takes into account the possibility that you might have many years ahead.

If your annual or monthly income withdrawals are too large, you might run out of money. For many retirees, the best way of establishing a safe annual drawdown amount (the amount of retirement savings withdrawn) is by consulting a financial adviser.

2. Inflation

Not only can the normal costs of living spiral, but healthcare inflation in retirement will swiftly outstrip the increases investors are accustomed to before retirement. Warren Ingram, executive director at Galileo Capital, points to other “rapid, unplanned fixed-cost increases,” few of which can be foreseen.

He cites above-inflation increases in things like electricity prices, rates and property taxes. “One could’ve reasonably predicted inflation of 6% to 8% over the long term, but these are costs you simply cannot control,” he says. “It seems very unlikely that the growth rate we’ve seen in recent years is going to slow down.”

While inflation is out of your direct control, you can take actions to mitigate its impact, Ingram points out. “If you are over-exposed to low-risk, interest-rate-linked investments, this will have an impact on your savings.” There’s a significant risk of going backwards if you’re not consistently outperforming inflation. The most effective way of ensuring that you are protected against the effects of inflation is to invest in an asset class that has the best chance of outperforming inflation over time – in other words, equities.

3. Limited exposure to equities

Ingram says he believes that the biggest retirement planning risk is being “underinvested in growth assets,” especially during retirement. The mistake people tend to make is to shift the bulk of their savings into defensive assets and exposure to equities. This causes investments to stop outperforming inflation and retirees start to get poorer in real terms.

Ensuring that you don’t make a sudden and complete shift to safe investments like bonds and cash is critical. Remember, at age 60 you may still have 30 more years to live. Staying invested in growth assets such as equities is one of the antidotes to the risk of outliving your retirement savings.

A financial adviser can provide advice on investing for sufficient returns, and can also assist with regular portfolio rebalancing, ensuring that your exposure to the various asset classes remains in the appropriate proportion.

4. Loss of a spouse

A loss of a spouse is out of anyone’s control, and this is a particularly severe risk for men, says Ingram. There is a “greater risk of depression and long-term health effects” in men following such a loss and this will have a huge impact financially.

On average, however, “women are widowed more often than men,” the Society of Actuaries points out. It points to research that suggests that “a surviving spouse needs about 75% of the couple’s income to maintain living standards.” And 75% is significantly higher than the 50% one may automatically assume to be the case.

There are ways to be certain you’re prepared for this kind of eventuality, however; the first to do is “making sure that there’s a proper plan for succession of everything,” says Ingram. “This includes things like where you will live and what kind of access to care and support you may require.”

Also make sure a correctly structured will is in place and that partners and families are provided for correctly. This also removes the risk of a surviving spouse having to “deal with a mess if a will is 20 to 30 years out of date.” An awareness of the tax implications of a spouse’s death can also help you plan correctly.

5. Family responsibilities

The phenomenon of “Kids in Parents' Pockets Eroding Retirement Savings”, known as ‘Kippers’, is when children simply don’t leave home until much later in life. This is a significant setback to the ability of their parents to save. Research from Australian outfit McCrindle puts the number at nearly one in four people aged 20 to 34 who continue to live in their parents’ home.

This is similar to the so-called sandwich generation, something Ingram says is very real in South Africa. These are people in their late fifties to late sixties who are supporting elderly parents of their own, and with children who are struggling financially too. There’s an emotional tie to them supporting their children as there are possibly grandchildren involved. This puts these soon-to-be retirees (or perhaps already retired savers) under enormous pressure.

There's no real way to control the financial position of those closest to you, but it is important to guard your retirement savings. Any contributions to support other family members need to be aside from your normal committed savings for retirement, not at the expense of these savings. To achieve this, you’d need to make cuts elsewhere.