While there are many financial risks we face at different points in our lives, retirement risks represent the possible events that could derail your retirement plans.

Near and throughout retirement, you will be introduced to many new risks that could’ve been ignored while working and saving for this once-far-off day.  But as you get closer to the retirement red zone, you will have to consider how to address and manage the Big Five Retirement Risks, which include: 

• Spending Risk (including the possible need for long-term care)
• Sequence of Returns Risk (SoRR)
• Purchasing Power Risk (i.e., inflation)
• Longevity Risk
• Investment Risk

Every individual will interpret and manage these risks differently, given their unique circumstances, resources, and attitude toward risk. Here are three important things that retirees should keep in mind as they navigate this retirement risk zone:

1)Your Advisor Might Not Be Helpful

You might be tempted to lean on your financial advisor for guidance in identifying and seeking to mitigate retirement risks.  The problem is that you may be led to suboptimal conclusions based on your advisor’s subjective point of view, especially if their compensation is tied to commissions or assets under management.  

If your advisor is a broker, whatever product they receive a commission for may end up being the solution.  An insurance product will be the best solution if your advisor is an insurance broker masquerading as a financial advisor.  If your advisor is paid based on the size of your portfolio, the solution might be to self-insure (and leave the money in the portfolio rather than taking other risk mitigation measures).     

2) An Objective Framework Can Help You Think Through Your Risks

Fortunately, there is an objective framework you can use to help you think through the best ways to manage your retirement risks.  As a flat-fee financial advisor, we are agnostic about the solutions used, as long as those solutions are ones we believe are in your best interest.  We use this framework to guide our clients through their risk exposure assessment and management options.

3) You Have Four Options to Address Retirement Risks

Ultimately, you have four broad options when considering any financial risk, including retirement risk.  The option you select will be unique and heavily influenced by your circumstances (need to take risk), resources (ability to take risk), and attitude toward each risk (willingness to take risk).  As retirement specialists, we find that the four options for addressing retirement risk can become a great framework through which you can develop your retirement risk-mitigation plan.

1).  Avoid 

The first option is to avoid the risk if possible.  Some risks can be hard to avoid completely.  Perhaps the risk of having to pay long-term care costs, like for an assisted living facility, is too great.  You may be in a position where you simply will never be able to afford it nor the cost to insure against it.  

You may have no other option but to take that risk off the table.  How? You could, for example, avoid this risk by making arrangements with a family member(s) to provide care if something happened and care was needed. 

2).  Assume

Your situation may be that you can afford to assume (or bear) the risk.  Piggybacking off the risk of experiencing a need for long-term care in the previous example, perhaps your resources are significant enough that the threat of having to pay long-term care costs at some point in the future is not that big of a deal.  Of course, you may not want to pay, but you could afford to do so if you had to.  In this case, you can choose to assume the risk.  Assuming a risk is synonymous with “self-insuring.”

3).  Mitigate

To mitigate a risk is to take action in an attempt to moderate or diminish the effect a risk can have.  Sequence of Returns Risk, for instance, is arguably the greatest risk that retirees face.  The mitigation of Sequence of Returns Risk through several different strategies can lead to substantially improved outcomes across the board and massively reduce the worst-case possible outcomes.  

4).  Transfer

To transfer a risk is to buy insurance against the risk, effectively transferring the risk to an insurance company in exchange for an insurance premium.  Perhaps the amount of money you’ve accumulated for retirement does not leave you with enough flexibility to be able to mitigate sequence of returns risk and you feel you need to remove this risk altogether.  

In this case, you could insure this risk by purchasing a single premium immediate income annuity through an insurance company that guarantees a steady stream of income for your lifetime, so you don’t have to worry about possible income fluctuations.

Develop a Risk Management Plan

To ensure you’re financially prepared for your retirement years, it can be helpful to assess the Big Five Retirement risks through this framework. Review each risk in light of the four options for navigating the retirement risk zone should help you reach the proper mix of tradeoff decisions and leave you with a solid risk management plan.  Managing your retirement risks properly will help keep your retirement plan on track so you can focus on making the most of each precious day in your retirement years.

Want to speak with a retirement specialist who can help you think through your risks and develop a risk management plan? We are happy to help - schedule your Complimentary Thrive Assessment with our team today.