Uncharted Territory: Navigating the New Retirement Risk Landscape

Retirement By Mark E. Caner, MBA, AEP, ChFC, CLU, CFP®
Uncharted territory business meeting
The fact that risk is all around us is nothing new. Representatives and clients know that in the financial world, certain risks can send retirement goals off course. What they may not realize is the retirement risks that have been staples of financial planning discussions for decades have evolved over those years. Changes in our society, our technology and our economic environment continue to add layers to these risks that aren’t always apparent from the surface.
 
Financial experts often differ on the names and number of risk factors that can affect a retirement plan. Four primary ones often cited are:
  • Lifespan Risk: Living too long and outliving your money.
  • Inflation Risk. Increasing prices reducing your retirement spending power.
  • Fluctuation Risk. Market volatility negatively impacting your retirement assets.
  • Experience Risk. Experiencing unexpected events that diminish your retirement standard of living.

You’ve no doubt heard cautions about these risks before in one form or another. Financial firms and representatives have warned clients of them for years. Like warning labels on items around our homes and caution signs on the roads we travel most, they become so familiar they can be easily dismissed. We do so though at our peril. In today’s world, added nuances make these familiar concerns new again. And possibly more important too. Let’s look at some examples:

Longer Lives Span the Risk Spectrum

Start with lifespan risk. Discussion of this topic seems obvious. The longer you live, the greater your risk of exhausting your assets. Given modern advances in healthcare and living conditions, expectations for lifespans have increased incrementally over recent decades. Do you know someone who reached age 100? It’s much more common these days. That makes it an even more important point to ponder.

Living longer doesn’t only carry the risk of running out of retirement income. It also heightens vulnerability to other financial forces. Simply put, the longer your life, the longer your exposure to all the other retirement risks. You have more time to battle inflation risk, face market fluctuations and undergo more events that affect your future and finances. Longer life spans reverberate across the spectrum of retirement risk planning.

New Opportunities Amplify Inflation

Inflation risk is on the surface another seemingly straightforward risk to discuss. How often have you heard the familiar examples of how prices for bread, milk and gasoline have risen, in an effort to help clients grasp the need for future planning? These days, however, inflation also comes in forms seldom considered in the past. Healthcare is a one example. Medical and drug costs have climbed at rates far faster than overall inflation in recent years. And though costs continue to increase, insurance coverage may have decreased.

Technology costs are another example of spending that has emerged as a budget buster. While it’s true costs for devices and services can go down as their usage becomes more widespread, it is also true much technology now in widespread use never existed before. Smartphones, GPS devices, high speed internet and tablet computers – plus all the software, services, upgrades and fees that accompany them – were unknown in the typical household budget just a decade ago. Today they are becoming virtual necessities.  In addition, as devices multiply in homes, so do their corresponding expenses. How many consumers now spend more on technology than utilities?

Granted, some retirees may not desire the full array of modern tech gadgets. Some just want to get away from it all and travel when they retire. That likely won’t bring relief. It now almost takes an accountant to understand all the added expenses on airline tickets. New charges for luggage and a multitude of other fees keep appearing. Environmental and security issues, along with carriers and governments seeking new revenue sources, have ushered in such things as fuel surcharges, facility fees, usage fees, check-in fees and even a “September 11” security fee.

The point is, when it comes to inflation risk, more products and services continue to add new variables to the cost-of-living equation. That makes the discussion of inflation risk ever more important today.

Evolving Volatility Assumes More Forms

As for fluctuation risk, that is to say, the impact of market volatility, representatives and their clients usually have touched on this in the past. But the discussion has gained greater urgency in the past decade. Since the economic downturn of the late 2000s, it’s a risk whose significance has earned more attention.

Markets react more quickly in today’s work where interdependent global economies, computer trading systems and modern communication technology prevail. That in turn renders the potential for more volatility a reality. In May of 2010, for example, the so-called “Flash Crash” that took markets on a stomach-churning one day round-trip resulted from a computer glitch.

And it’s not just stock market volatility. The investment landscape continues to change and grow, adding elements and options that never before were a factor. As ever more complex investment alternatives and methods multiply, so too do market forces. Unprecedented variables arguably create the potential for greater volatility.

Events Expand to Encompass More

Experience risk likewise is another expanding consideration. Representatives and their clients routinely discussed the expected and unforeseen events that impact someone’s retirement planning. Things such as births, deaths, marriage, divorce and all the events of the human condition merit planning. In the modern age though, these events differ from decades before. In fact, they can exert added impact.

For example, we all know divorce carries implications for financial risk. Now, as divorce rates climb among current generations, it is even more so. Likewise, job loss is an event that is even more common in recent years. In addition, recent history has seen the emergence of societal changes that have given rise to the sandwich generation, where households may include children who remain home longer due to difficulty in obtaining a job or a house of their own, and grandparents moving in due to longer lifespans and greater needs. This multi-event, multi-generational scenario significantly impacts retirement savings. Other events beyond one’s control can stem from public policy changes. Rising costs for programs such as Social Security, Medicare and Medicaid amid growing deficits and debt carry new implications for traditional government-provided elements of retirement security.

There’s no question fraud and theft always have been financial risks to consider too. Again though, with advancing technology, the onset of email fraud, identity theft, as well as personal and corporate computer data loss, all have become more prevalent. The risk of loss through electronic financial scams now exists where they never did before, and retirees may be especially vulnerable. Once again, a risk that never existed before now is magnified and must be addressed.

Take a New View: The Future is Now

The importance of reckoning with retirement risks always has been imperative. Going forward however, changes in society and advances in technology are expanding and adding new meaning to traditional understanding. In examining risks with their clients, representatives should dig deeper to add greater value to the modern risk assessment process and further the consultative needs-meeting relationship.

The retirement risk landscape continues to shift. Uncharted territory lies ahead. The key is to be proactive in mapping the journey, tracking progress, identifying risks as they emerge and maintaining flexibility to address the challenges they present.

IMPORTANT DISCLOSURES
©2012 Western & Southern Financial Group. All rights reserved. Permission to quote or cite from this material is granted upon request. To obtain permission, or for additional insights on this topic, please contact us.
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