Ken Russell, a financial adviser at Alexander Forbes, offers these insights into common financial risks facing us when we reach retirement age. [Source: Personal Finance in The Independent on Saturday, 21 March 2015]
The financial risks you face before you retire are:
- Waking up too late to the need to save.
- Unexpected life events. Divorce or illness can seriously affect your finances. Russell says that it can take 10 years to recover financially from a divorce.
- Forced early retirement. Most retirement funds plan on you retiring at age 65. But if you are retrenched or forced to retire at 55, it means you lose out on 10 years of contributing to your retirement savings, and you have to live on your savings for 10 years longer.
After retirement, you may face these risks:
- Inflation. This is a serious risk, considering that you can easily be in retirement for 30 to 35 years, Russell says. “It’s important that your income is protected against inflation.”
- Medical costs. Your medical scheme contributions can consume 10 percent of your initial retirement income, and these will increase above inflation for the rest of your life, meaning they may end up consuming 25 or 30 percent of your income. “Sixty percent or more of the medical costs that you incur over your lifetime will be incurred after the age of 60, making it important to remain a member of a good medical scheme,” says Russell.
- Bad decisions. Investing in fraudulent companies or projects, drawing too heavily from a living annuity, buying or selling property or stocks and shares at the wrong time – all can have disastrous results. It’s important to have a good adviser you can trust.
- Longevity. You need to plan for a longer retirement, because people live longer, on average.