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Wade Pfau: Does Your Mindset Affect How You Make Retirement Income Decisions?

Research Articles

Managing the personalised risks of retirement

Retirees are fully aware of the abundance of financial risks that may adversely affect their retirement plans. Some of these risks relate to the macro-economic environment over which individually we have little control, like spiralling living costs and medical care expenses, the eroding of the purchasing power of one’s financial assets over time (inflation and weakening exchange rate), disappointing or below-par market returns, and lower-than-expected interest rates.

One can plan and manage for those risks by factoring in such dire scenarios in your planning; i.e. to ensure an adequate “margin of safety” in your retirement plan, if things go haywire. For example, using conservative return assumptions and not necessarily recent market returns (relatively high real returns) as the norm going forward. If the outcome of such “stress testing” indicates a thin margin of error it probably means one should work longer than you initially planned for and save more, unless you have viable backup plans to supplement retirement income.

But macro-investment risks are not the only retirement risk one will endure, there are a number of other risks that can be categorised as personal, or if you fancy the more stylish term, idiosyncratic, which we all are potentially prone to, one way or the other. Personalised risks are to a certain extent more preventable than macro-risks, but not necessarily more manageable once manifested. In fact, the financial consequences thereof are probably much harsher in a retiree’s life than the effects of macro-economic risks.

Source: NewsletterQ1_2016