The American College’s RICP curriculum includes a list of 27 risks that retirees face. Twenty-seven!
I discuss this list regularly with clients to help them understand how important this phase of their planning is, and also to pinpoint a few risks that are incredibly important but often overlooked. Beyond basics like market risk and interest rate risk, here are the seven that you may find valuable:
1. Longevity risk
Medical advances are leading to longer lifespans. This is probably no surprise to you, but I would like you to consider a new twist on this growing challenge. When retirees live longer lives, not only do they run a greater risk of depleting their assets, they can lose perspective about time itself. This can have a significant impact in the realm of behavioral economics. Specifically, the decisions they make early in retirement may not have immediate consequences. A bad choice in the first year of retirement may not show its effects in year two. But over many years, the outcomes of their decisions compound, either positively or negatively.
6. Health care expense risk
It’s no mystery that health care is on the minds of aspiring retirees. How can we plan for this risk when we cannot accurately quantify the cost? Reduce the variables. As in a mathematical equation, too many unknowns create an unsolvable problem. In retirement planning, too many variables can prevent us and our clients from adequately addressing any particular concern. The result is a swirling storm of questions and partial answers.
7. Long-term care risk
For people age 65 or older, there is a 40 percent chance they will step foot into a nursing home during their lifetime. This risk is not new to most advisors. What’s interesting is how much this risk affects their retirement income later in retirement. Some refer to this retirement spending curve as the “retirement smile.”