Whether you are on the cusp of retirement or have already retired, assessing your potential risks in retirement should be a significant part of your retirement planning.
Research conducted by YourLifeChoices shows that almost 80 per cent of retirees are worried that they will outlive their savings, and members articulated those fears in last year’s Retirement Affordability Index.
While this is the No.1 risk according to YourLifeChoices’ members, the other side of the coin is the mortality risk (having a shorter life than expected, which is thankfully in decline) often leaving a surviving spouse or partner to manage personal and financial affairs.
Other retirement risks facing retirees are health risks, market risks, event risks, and tax and policy risks. Here’s our breakdown of the risk factors affecting retirement.
Longevity risk
According to the latest figures from the Australian Bureau of Statistics (ABS), male life expectancy has increased 1.5 years over the past decade and is now the highest on record.
Australian men born today have a life expectancy of 80.5 years compared with 84.6 per cent for females.
“Australian males can now expect to live 10.8 years longer than the world average of 69.7 years, according to the United Nations 2015–2020 estimates,” ABS demography director Anthony Grubb said.
“Female life expectancy remained the same as the previous year (84.6 years) and compares to the global average of 74.3 years.
“Australians have a higher life expectancy than our counterparts in New Zealand, the United Kingdom and the USA.”
While Australians living longer should be good news, it does mean that the risk of outliving your money in retirement will increase.
Health risks
These include both the risks of falling ill and the risk of being unable to afford adequate health, health insurance and aged care. All of these costs are increasing, particularly the cost of private health insurance.
In a recent Friday Flash Poll, a huge majority of YourLifeChoices members said they were paying too much for private health cover and getting very little in return, with 75 per cent of those who have had to use their private insurance discovering it was not enough to cover medical gap fees.
The Friday Flash Poll: What’s your take on private health cover? revealed that 85 per cent of the 1121 respondents have private health insurance, with 81 per cent saying they pay too much for cover – only six per cent saying they pay what they think is fair.
Health insurance premium rises have outstripped CPI for the last five years. Since 2013, the average yearly premium hike was just over five per cent. Since 2013, annual CPI increases have averaged just under two per cent.
This is one of the reasons that health risks are one of the fastest growing risk areas for a comfortable retirement.
Market risks
The components of market risk for retirees include poor investment returns that affect retirement lifestyles, inflation that erodes savings, interest rate movements that adversely affect savings, and overreaction to market volatility.
Event risks
This is the risk that large unexpected expenses – such as unavoidable home repairs – may have a significant impact on a retiree’s savings. Such costs can disrupt a carefully-constructed retirement plan.
Tax and policy risks
With an election on the horizon, the potential for changes to retirement income streams seems almost certain. Already there have been some massive changes to Australia’s superannuation system in the last five years and there are plenty more coming regardless of who wins the election. It can be difficult to plan for these changes, but these are some of the things that need to be taken into account at retirement.
What do you think is the single biggest threat to living comfortably in retirement?
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