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Managing retirement risks
There are many other different risks you should take into consideration during your retirement. These range from the risk that you might be too cautious and therefore get locked into low returns to being too optimistic and therefore run the risk of losing your cash or running out of income.
Other risks that you should consider include:
- Income risk – If you don’t plan wisely you may end up short of income in later life and at the very worse run out of income
- Annuity rate risk – You may decide to purchase an annuity at some time during your retirement and if annuity rates reduce you will get less income. If annuity rates improve you will get more income
- Stock market risk – If your pension pot is invested in the stock market the value will rise or fall depending on equity prices. If you invest in drawdown you must watch out for ‘sequence of returns risk’
- Inflation risk – This affects your future spending power so if your income does not increase over time over time you might not have enough income to maintain your lifestyle
- Health risk – If your health deteriorates you may have to pay for long term care or help with daily living. It is important to consider this when thinking about your income requirements
Of all these risks the most important is investment and you must work out how much risk you are prepared to take and how much risk you can tolerate. This begs the question: “how much risk should you take”?
The short answer is enough risk to avoid being locked in very low returns for evermore but not too much risk that you put your future retirement plans in jeopardy.
When assessing how much risk to take you should consider not only your attitude to risk but also your capacity for loss. Attitude to risk is an easy concept to grasp and is normally expressed as low risk, medium risk or higher risk. Your attitude to risk is normally measured as your tolerance to taking investment risk and financial advisers have special questionnaires and tools to help assess your risk profile.
Capacity for loss is described as your ability to absorb falls in the value of your investments or income without it causing you adverse financial hardship or emotional strain.
If you want to make the most of pension freedoms you should start planning ahead and make sure your financial affairs are in good shape in the years running up to retirement.William Burrows
Offices in London and Northampton
Call: 07730 435 657
Better Retirement Group Ltd
|400 Pavilion Drive
| 68 Lombard St