To live an ideal post-retirement life is what you work for. You just want to relax, travel the world. You could also start to pursue a hobby you left long ago. Most importantly, you should live a stress-free life post your retirement. But what is life without risks and uncertainty? You could encounter various risks post your retirement as well. There are certain risks that you can face post your retirement. These tend to threaten your financial soundness and hinder your retirement plan to live stress-free after retirement.
Here are the 4 most common risks you can face after you retire.
1. Risk of living too long2. Risk of unexpected medical expenses, i.e., critical illness, accidents3. Systematic changes, urban development etc4. Any other unexpected costs
How to Prepare for Living Peacefully with a Retirement Plan?
You have planned to live for 80 years, but what if you surpass that age? Will your corpus be enough? The longer you live, the more likely will you be to outrun your savings. This is known as the risk of longevity.
Here are a few suggestions:
a. Life Long Pension Plan:
Pension schemes and plans can prove to be a good help in planning for a longer than expected life. Lifetime pension plans can even provide you with a regular income stream for as long as you live
For example, You decide to set aside money in a pension plan when you are 30. You are currently earning 1 lakh with an increment of 5 per cent per year. You decide to put 9 per cent of your annual income into a pension fund which provides a ROI of 8% for 30 years. Then your corpus will be Rs 2.28 Cr.
But if you start withdrawing at the same rate you were earning then you will have all your money used up till 90. What if you live past 90? Where will the money come from then? You can follow the below options:
b. Increase the Rate of Savings:
You can increase the amount you put into your pension fund from the start. In the above example, if you increase your savings from 9% to 15%, your corpus will result in Rs 3.8 Cr. This is how compounding benefits you.
c. Reduce your expenses:
Instead of increasing the savings, if you cut back your expenses, then your fund will run for a longer time. Withdrawing less than the expected amount would increase the longevity of your corpus.
Risk of Critical Illness and How to Combat it?
If you or your spouse suffer from a disease that is serious and requires extensive medical care such as cancer, heart problems, then it can be classified as a critical illness.
Why Critical Illness is Considered a Risk?
Critical illness is considered a risk as this causes a huge burden on your finances.
Treatment of such illnesses can leave a huge hole in your pocket. These medical bills can rise to several lakhs and affect your survival corpus for the future.
What can be the solution?
Many life insurance products, such as term insurance provide you with an option to enhance your protection through riders. Riders improve the scope of your policy. You should buy a term plan which offers critical illness benefits.
iSelect Smart360 Term Plan
iSelect Smart360 Term Plan from Canara HSBC Life Insurance offers the option to continue the cover till the age of 99. The plan carries critical cover as a default benefit. Thus, you can maintain the critical health cover throughout your life.
If this option is chosen then you are entitled to receive a lump sum amount if you get diagnosed with a critical illness. This can help you a long way in meeting the heavy expenses associated with the disease.
Critical illness covers under itself, diseases such as heart attack, cancer, paralysis, etc.
Systematic changes are the changes that affect the broader environment and usually are far beyond your control. These changes usually take place gradually, but a sudden spurt is also likely at times:
a. Inflation Risk
The value of the money you possess today, may not remain the same 10 years from now. Inflation causes a decrease in the value of money. This is not a new thing. So you should always target to save more than expected.
But certain events can shoot up the inflation level to an unthinkable extent. If the rate of inflation gets very high then it could result in your corpus getting used up sooner than it was supposed to be as your income will not increase with inflation. Your corpus remains the same.
b. Interest Rate Risk
Excessive change in the interest rates, both high and low can pose a risk to you.
Low interest rates prevailing in the market can decrease the value of your retirement corpus. Low interest proves an even bigger risk when you are dependent on the savings to live post-retirement as now you have to save more to keep up with expenses
On the other hand, when the rates are high, the value of bonds declines.
c. Stock Market Risk
This is the risk that can concern you if you invest in the stock market. The stock market, though known for its ability to give higher returns, witnesses huge ups and downs. A recession in the stock market can lower your portfolio and thus your corpus.
How to Mitigate Systematic Risks?
Though these risks are out of your control, you can try to mitigate them or reduce their effect to some extent. Here’s how
1. Diversity is the Key
Diversity in investments lets you mitigate the risk associated with markets. This can be summed up by the saying, don’t put all your eggs in one basket. Instead of investing in one source, you should try to invest in multiple securities.
For example, dividing your investment in equities, debt, and even liquid funds according to risk capabilities.
2. Investing in Inflation-Adjusted Assets
You cannot stop inflation but can invest in assets that can reduce its effect on your corpus. Investing in assets that go hand in hand with the inflation rate can benefit you.
These assets are
- Real estate
Risk of Unexpected Costs
However secured you are, both physically and financially post-retirement, you still do not know what the future holds for you. Unforeseen events such as an accident that can bring your way some large medical bills can shake your financial stability in a second.
For example, an accident resulting in severe injuries to your spouse’s health can shake the balance of your existing corpus.
Costs of staying in the hospital, medicines, and even of a caretaker can catch you unguarded. This is why you need to prepare for uncertainties.
How to Deal with Unexpected Costs?
Insurance policies can help meet unexpected costs. But a healthcare plan will be useful till the age of 70. If this occurs when you are way past 70 you will have no option but to bear these expenses with your own money. These costs will not only take a toll on you mentally but financially as well
This can be done by creating an emergency fund. Set aside a certain amount from your retirement corpus every month. This will act as your emergency funds. This will help you if you in the times of an unexpected house repair or an accident etc.
Now you have an idea about how these risks can affect you post your retirement. Though you cannot change the future, the least you could do is to prepare for it. A well-thought-of life insurance policy and planning well in advance will go a long way to make sure that you fight these risks and lead a peaceful life after you retire.