PERSONAL AND FAMILY RISKS FOR RETIREES

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Sweethoney
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PostSweethoney on 2nd November 2012, 4:34 pm

EMPLOYMENT RISK
Many retirees plan to supplement their income by working either part-time or full-time during retirement. In fact some organizations prefer to hire older workers because of their stability and life experience, but success in the job market may also depend on technical skills that retirees cannot easily gain or maintain. Employment prospects among retirees will vary greatly because of demands for different skills and may change with health, family or economic conditions.
Choosing the point at which you want to retire is integral to retirement planning. Later retirement is an alternative to increased saving, but there is no certainty that appropriate employment will be available. Working part-time is an alternative to full-time employment, and part-time jobs may be easier to obtain.

Longevity Risk
Running out of money before you die is one of the primary concerns of most retirees. This is an even larger concern today as life expectancies have risen in the developed countries like Japan and Hong Kong while in the developing countries like Nigeria, Liberia and lots more, the life expectancies is very low, even 30% below world average. Check below the life expectancies of different countries as computed and complied by United Nations (2005-2010) data of life expectancy at bith of total 194 countries in the world and Nigeria ranked 182. the life expectancy at retirement is just an average, with about half of retirees living longer and a few living past age 100. Thus, planning to live to a specified age is risky and planning to live to your life expectancy will be inadequate for about half of retirees. The longer you live the more exposure you will have to other risks that are listed below.
However, those who are managing their own retirement funds over a life time have to perform a difficult balancing act. Being cautious and spenching too little might needlessly restrict your life style and spenching too much increases the danger of running out of money.
A person or annuity can mitigate some of the risk because it provides an income stream for life.
However, there are some disadvantages, including loss of control of assets, loss of ability to leave money to heirs and cost. Although, people may not want to annuitize all their assets, annuities should be considered as an important part of retirement planning.

Death of a spouse
The grief over a spouse’s death or terminal illness contributes to high rates of depression and suicide among the elderly. A spouse’s death can lead to a reduction in pension benefits or bring additional financial burden. Also, the surviving spouse may not be able or willing to manage the finances if they were usually handled by the deceased person or spouse.
Similarly, financial vehicles are available to protect the income and needs of survivors after the death of a partner or spouse, such as life insurance, survivors’ pensions and long term care insurance. Planning is also an important aspect of providing for survivors.

Change in Marital Status
Divorce or the separation of a cohabiting couple can create major financial problems for both parties. It can affect benefit entitlement under public and private retirement plans as well as individuals’ disposable income. This part could be linked to the book of ecclesiastic 4 vs 9-10 “ Two are better than one, because they have a good reward for their toil, for if they fall, one will lift up his fellow, but……………..”
Splitting the maritals assets will almost certainly lead to an overall loss in standard of living, especially if it was necessary to pool income and resources to maintain the standard of living to which both parties had become accustomed. Some experts believe that an individual may need about 60-75% of a cohabiting couple’s income to maintain his or her standard of living. This is because some expenses, like rent and utilities remain the same, regardless of the number of people living in a household. Although, divorce rates among older couples are far lower than for younger couples, it is not uncommon for a retirement age couple to get a divorce.

Unforeseen Needs of Family Members
Many retirees find themselves helping other family members, including parents, children, grand children and siblings. A change in the health, employment or marital status of any of the family members could require greater personal or financial support from the retiree for that individual. Examples of financial assistance include paying health care costs for an elderly parent, paying higher-education fees for children or providing short-term financial assistance to adult children in the event of unemployment, divorce or other financial adversities. During retirement planning, you should recognize the possibity of providing financial support for family members in the future, even if this does not seem likely at of before retirement.

Health Care and Housing Risks
Unexpected Health Care Needs and Costs
Theses needs and costs are a major concern for many retirees. Prescription of drugs are a major issue, especially for the chronically ill. Older people usually have greater healthcare needs and may need frequent treatment for a number of different health-related issues.
Medicare is the primary source of coverage for healthcare services for many retirees. Private medical insurance is also available, but it can be costly. The society of Actuaries (SOA) says that healthcare costs can be mitigated to some extent by committing to a healthy lifestyle that includes eating right, exercising on a regular basis and using preventive care. In addition, long-term care insurance can pay for the cost of caring for disabled seniors.

Change in Housing Needs
Retirees may need to change from living on their own to other forms of housing, such assisted living, which combines care with housing and independent living, which combines some assistance with housing for an individual in a given situation may not be available in the chosen geographical area or may have a long wait for entrance. The likelihood of requiring day-to-day assistance or care rises substantially with age, but changes in individual cases are often hard to predict, because they vary with one’s physical and mental capabilities, which themselves change with age. Changes can occur suddenly, due to an illness or accident or gradually, perhaps as a result of a chronic disease. Always note that long-term care of a retiree is some time more than just a nursing home.
Lack of Available Facilities or Caregivers
Facilities or caregivers are sometimes not available for acute or long-term care, even for individuals who can pay for it. Couples may be unable to live together when one of them needs a higher level of care for people who have lived together for decades, this can result not only in increased costs, but in emotional stress as well.
In general, little advice is available from the state or the financial-services industry on planning for long-term care costs. This may lead consumers to make uniformed decisions or to defer them and hope for the best.

Financial Risks

Inflation Risks
Inflation should be an ongoing concern for anyone living on a fixed income. Even low rates of inflation can seriously erode the well-being of retirees who live for many years. A period of unexpectedly high inflation can be devastating for those living on a fixed income.
According to the SOA, retirees and would-be retirees should consider investing in equities, a home and other assets, such as Treasury Inflation-Protected Securities (TIPS) and annuity products with a cost-of-living-adjustment feature.
These types of products help offset inflation. In addition, would-be retirees can choose to continue working-even if it is only on a part-time basis.

Investment Decision
Under investment decision, we are going to look into five (5) sub areas very essential but not limited to it. Just as an investor may discuss or ponder over what decision to embark on concerning an area to invest so also been alone by retirees. The five areas includes certainty, uncertainty and business risks and low interest rate and stock market risk.
Certainty is the state of perfect knowledge about the market conditions on your retirement finances (i.e. most of the parameters and market condition are known or can be predicted). When it comes to certainty, they is only one rate of return on the investment and that are known to the investors or retiree intending to invest. This implies that investor or retiree is fully aware of the outcome of their investment decisions. For example, should you deposit savings in “fixed deposit” bearing in mind of 4% interest, you know for certain that the return on your investment deposit is 4%, be it corporate or government bonds or treasury bills and lots more, bearing a certainty interest in mind you are sure of the interest including the principal. I9n this situation, you are sure that there is little or no possibility of the bank, corporate or government defaulting on interest payment or on refunding the money. This is known the state of certainty.
However, in reality, a large area of investment decisions falls in the realm of risk and uncertainty. It is important to note that “risk” and” uncertainty” are in pari pasu.
Whenever there is uncertainty, there is risk. Some useful techniques have been devised and developed by the Actuary, financial and pension experts to facilitate a better retire decision-making under the condition of risk and uncertainty. A lot of retirees have failed woefully after collecting their lump sum of either 25% or above due to lack of proper planning, risk and uncertainty in deciding HOW, WHERE AND WHEN to invest and their lump sum vanished without any left over.
I know, you may want to know, how much was this lump we are talking about, it varies between N1.5M and N2.0M (i.e. million naira) respectively all they can only fall back on is their monthly pensions. Please don’t be a victim to that, okay?

Business Risks
In a business point of view, it refers to a situation in which a business decision is expected to yield more than one outcome and the probability of each outcome is known to the decision makers or it can be reliably estimated. Lets evaluate the investment decision taken by a retire after collecting his lump sum while considering the business risk involve. A retiree invested his lump sum in a super-market, there are four probable out-comes:
I. His sales may be more than double
II. It may be just double
III. Increase in sales may be less than double
IV. They may be no sales increase at all.
Analyzing these outcomes stated above, when the outcome of (i) and (ii) becomes successful, he’s made but when the outcomes of (iii) and (iv) surfaces he have made a great loss. Check on more examples on the stock market risk below.

Uncertainty risk:
This refers to a situation in which there are more than one outcome of a business decision and the probability of no outcome is known nor can it be meaningfully estimated. The reason the unpredictability of outcome may be as a result of lack of reliable market information, inadequate previous experience and high volatility of the market conditions. Lets consider the case of insurance companies predicting fairly accurate the probability of death rate of insured people, rates of building gut by fire and many more but it is not possible to predict the death of a particular insured individual, or a particular house catching fire, so also it has been to lots of retirees failing in their business adventures due to the uncertainty nature of the market.
However, there is a vast area of investment in which the outcome of investment decision is not precisely known. This implies that an investor (Retiree) do not know precisely or cannot predict accurately the possible return on an investment. Let’s take this example to make it clearer: Suppose Mr. Eleje invests in a product in Research and Development to innovate a new product and spends money on its production and sale. The success of the product R&D in a competitive market and the return on investment in R&D in production and sale of the product can hardly be predicted accurately. In the affairs a life, a large number of business decisions are taken under the conditions of risk and certainty. The long-term investment decisions involve a great deal of uncertainty with unpredictable outcomes.


Interest Rate Risk
Lower interest rates reduce retirement income by lowering growth rates for the retirement savings account (RSA) and assets. As a result, individuals may need to save more in order to accumulate adequate retirement funds. Here the PRA 2004 section 4 and 5 supports additional or voluntary contributions by employees while in service. Annuities yield less income when long-term interest rates at the time of purchase are low. Low real interest rates will also cause purchasing power erode more quickly. Always note that all annuities are tax differed until at maturity period or withdrawals.
Similarly, low interest rates can reduce retirement income and can be particularly risky when people are depending on drawdown from savings to finance their retirement. On the other hand, a problem also exists if interest rates rise as the market value of bond’s drops. Increase in interest rates can also rates can also negatively impact in the stock market and the housing market, thereby affecting the retiree’s disposable income. As such, high real interest rates, over and above rates of inflation, make retirement more affordable.


Stock Market Risk
Stock market losses can seriously reduce retirement savings. Let consider the stock market crashes in 2000-2003 and that of 2008-2009 which lead to a dramatic falls in share prices. In 2000, the average pension fund had 60-70% of its assets invested in equities with some every investing up t6o 90%. This is on the grounds that in the long-term, they will generate higher growth than the alternatives such as corporate bonds and government gifts. This were been done by private companies in the United State which lead to the decline in the number of active members of private sector occupational pension schemes moving from defined benefit schemes to contributory scheme. The greater the investment returns the less the company then has to provide in contributions to the fund. However, the reason equities have higher returns than bonds is that they have higher risk.
However, we are made to understand that common stocks have substantially outperformed other investments over time and thus are usually recommended for retirees as part of a balanced asset allocation strategy. The sequence of good and poor stock market returns can also impact your retirement savings amount, regardless of long-term rates of return. For instance, a retiree who experiences poor market returns in the first couple of years in will have a different outcome than a retiree who experiences good market returns in the first couple of years of retirement, even though the long-term rates of return might be similar. Early losses can mean less income during retirement. Later losses can have a less-negative impact, as the individual may have a much shorter period over which the assets need to last.

Public Policy Risk
Government policies affect many aspects of our lives, including the financial position of retirees. These policies often change over e along with government policy. Policy risks include possible increases in taxes or reduction in entitlement benefits from Medicare or social security. Retirement planning should not be based on the assumption that government policy will remain unchanged forever. It is also important to know your rights and to be aware of your entitlements to federal states or local authority benefits.



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