Life is about enjoying the journey - the climb to the top, enjoying the view, and the rewarding climb back down. When it comes to retirement planning, many people today only consider the first half of the mountain: Income Accumulation. And yet, the challenges we face saving for retirement are different from the challenges once retirement begins.
Below are some points to help you enjoy both the climb up and the return journey down from your 'retirement mountain'.
The first step is to understand the six key risks to your income streams during the Distribution Phase - coming back down the mountain.
1. Market risk - protecting your savings
As you would be aware, when you invest your money you take on an amount of risk. There is no doubt that your superannuation savings may be negatively affected by falling markets - just as they are positively affected when the market is in your favour. A retirement portfolio needs to smooth your income and manage volatility.
2. Longevity risk - outliving your assets
With life expectancy rates rising, the good news is that you may live longer; the risk is you may outlive your savings. Factors that impact longevity risk are health and lifestyle. Currently, the Australian Bureau of Statistics calculate that the life expectancy of a 65 year old male is 84 and a 65 year old female is 87.
3. Inflation risk - uncertainty of changing inflation in areas of spending
It is hard to know the cost of living in years to come so it is important to factor in inflation to everyday costs as well as to keep that little bit extra aside 'for a rainy day'. Putting it all in cash may keep it safe, but it doesn't keep pace with the inflation. This is why a retirement portfolio often needs assets that have a growth component, even if this means some volatility.
4. Liquidity risk - flexibility to access cash
If all your wealth is held up in assets that cannot be quickly sold or traded you may be at risk. Having a well balanced portfolio where you can access cash when needed is important.
5. Health risk - health care expenses
An unexpected illness can set you back in medical expenses. Having cash reserves is important and reduces the risks of selling assets that are required to be invested. This raises the importance of having adequate insurance cover as well as having access to some extra savings if needed.
6. Legacy risk - ability to pass on assets at death
Ensuring all your assets will be distributed according to your wishes is worth planning for. Your adviser will help with estate planning to ensure your affairs are structured correctly so that assets will be passed onto your chosen beneficiaries in the way you wish them to be.
If you have any questions in relation to this column, the author can be contacted by firstname.lastname@example.org or 49 43 4876. Philip T. Smith is a principal of Newcastle based Hunter Financial Planning, Authorised Representatives of Total Financial Solutions Australia Ltd. (AFSL 224954). The information in this column is general information only.
This article was featured in the Newcastle Herald on Monday, 10 December 2012.