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6 Unexpected Risks To Consider While Planning Your Retirement

  • Author: Agrima Nigam
  • 5 min read
  • April 20, 2021
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A comfortable and enjoyable retirement requires years of saving and planning. This means that you build a sound budget and you may even plan our retirement down to the very last penny by accounting for most expenses. However, it is also crucial to take into account certain unexpected expenses and plan accordingly to avoid unpleasant road bumps in your retirement journey. With time, our level of expenditure changes. So as you work on developing a plan, it is important to assess what costs may go up, what costs may go down, and what are the determining factors behind each of these costs. To help you prepare for your smooth and carefree retirement here are 6 unexpected risks to plan and look out for.

Unexpected Medical Bills & Long-term Health Care

As we grow older, our healthcare needs also tend to increase. Many people may require constant medical attention and treatment concerning different health issues and may even have to take expensive prescribed drugs for a long period of time. Even in the absence of certain health issues, it is advised by many health professionals that people must get frequent checkups after the age of 45 years. Many companies offer and even sponsor yearly health checkups of their employees, however, post-retirement people have to bear the cost of frequent checkups on their own.

Long-term care is another concern for most people over the age of 65 years. The prices for a standard nursing room in a hospital or even at-home nursing services can be exorbitant. Most retirees cover these expenses by seeking help from family members, however, it is important to prepare for these expenses beforehand.

Some ways in which you can cover these expenses are:-

  • Adequate Healthcare Insurance

The healthcare cover provided by employers ceases post-retirement, hence it is crucial to set aside adequate funds for post-retirement medical expenses. The cost of healthcare in India paired with inflation is on the rise consistently and so one must include a health insurance plan in their retirement portfolio. A proper health insurance coverage can protect you from financial burden caused due to unexpected medical expenses.

  • Long-term Care Insurance

Although you may end up paying for something that you may not need, getting long-term care insurance will turn a potential financial surprise into a predictable expense. Long-term care insurance will allow you to obtain the high-quality care you need without having to sell your assets. If you’re still healthy and insurable, it’s best to buy a policy while you’re in your 50s or early 60s to lock in a lower premium.

Inflation Risk

Inflation risk is one of the inevitable risks that are difficult to determine. Even if you analyze inflation rates for over years or hire a financial advisor to help you estimate your retirement corpus based on inflation, you would truly only be able to get an approximate figure. Low inflation rates can prove to be financially burdening for retirees who live for a long time, moreover, inflationary shocks can further lead to significant deduction of the retirement corpus. As a result, you’ll need to save a lot more money than you think you’ll need at today’s rates. This will help you from running out of money during your retirement.

Certain ways in which you can account for inflation in your retirement portfolio:-

  • Real estate assets

Investing in real estate is a great way to hedge against risks due to inflation. It is a profitable investment as land and property appreciate over time and investors tend to receive lucrative returns on their investments. The best way to guarantee periodic returns/income that is adjusted to inflation is through rental properties. Rental properties ensure a monthly income through rent and this is influenced by the inflation in the economy. Hence, when inflation rises, the rent also rises, providing you with higher returns in addition to the gradual increment in the value of the property.

  • Dividend-paying stocks

Another viable option is to invest in stocks that pay good dividends. Dividends are a monetary return paid by businesses that keep pace with inflation. Dividends, like inflation, can be measured annually. The dividend yield is calculated by adding all dividends paid during the year and dividing it by the stock price. The yield must be greater than the annual rate of inflation.

  • Inflation-indexed bonds

Inflation-indexed bonds work on the mechanism to protect investors from the effect of inflation. So, instead of paying the return on the original principal amount, the rate of return is applied to the adjusted principal amount (Inflation% *Principal amt. +Principal amt.). This way the principal is indexed to inflation and hence, IIBs safeguard the principal from inflation.

Unanticipated Cost Of Housing Maintenance

Most retirees who self-occupy their residential property, fail to look beyond monthly or yearly home loan payments while estimating the long-term housing costs. Unexpected home repairs, damage due to environmental factors, and upgrades in the interior to make adjustments to accommodate wheelchair access or other medical instruments around the house can be a costly affair. If your house was initially rented out to tenants, then there are chances of structural damages and repairs.

It is best to have your property inspected by a professional to estimate the hidden problems before you retire so that you can afford to make the necessary repairs. It is also important to set aside a certain percentage of your funds for the maintenance of all the properties that you own. For many retirees, it can be tiring to travel and run around in order to manage their properties, check out our article on managing rental properties remotely.

Losing A Spouse

Along with the emotional distress, losing a spouse unexpectedly could disrupt your retirement plan as you would have expected. Therefore, it is important to anticipate the possibility and prepare accordingly. The good news is that you can take steps to mitigate these risks:-

  • Life Insurance

Buying adequate term life insurance can help you reduce considerable risk and financially protect your spouse. The death benefit of a policy could help: Pay living costs, such as rent or a mortgage, and replace lost income. Pay off any debts you’ve accumulated.

  • Pensions & Other Incomes

Most spouses inherit the pension of their wife/husband upon their death. Reassess how you take your pension as it will determine how you can pass on your pension to the beneficiary and make sure that your pension provider has up-to-date details of your spouse/beneficiary. Even though the monthly amount of pension may decrease but it will help you sustain for years to come. You must also engage in real estate planning to determine who will receive the rental income from your properties.

Longevity Risk

Outliving your retirement corpus is another concern. You may estimate your expected age on the basis of your current health status while planning your budget, however, it is important to keep a certain amount of funds for a longer expected life span. As your expected life span increases, so does your costs and this also means that you would be exposed to other risks longer than anticipated. Most retirees depend on their family members to look after them after a certain age, even so, it is crucial that you set aside an emergency fund should you require it.

A longer expected life span may force you to reassess your expenditures and savings. You may want to cut down unnecessary expenses and along with this, make sure you have an income stream for life. An income stream for life may include pension, monthly rental income from your properties, monthly dividend payments, or any business earnings, etc.

Future Relocation

Many people consider moving to a different city or a different neighborhood with better amenities, weather, and living culture to enjoy their golden period of retirement. It may require some to even sell their existing residence to buy a new one in their intended destination. In such a case, you must evaluate the ideal time for you to put your property on the market and analyze the demand for properties similar to yours for some years before your retirement.

It is prudent to do a thorough analysis of the city that you are planning to move to. Understand the daily living expenditures of that city, survey your ideal neighborhood based on affordable home rates and be aware of the healthcare provisions and policies for senior citizens.

Although some risks can be reduced by careful preparation, many others are entirely beyond our control. Making smart investment choices as well as understanding possible post-retirement risks and factoring them into the retirement planning process, will help to ensure that they are mitigated and properly handled. The main takeaway of this article is to provide you with a list of certain unanticipated risks to keep in mind while building your retirement plan to change these unexpected risks into predictable expenses should they arise in the future.

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6 Unexpected Risks To Consider While Planning Your Retirement FAQ’s:

What are the benefits of investing early for retirement?

Compounding interest is a great advantage of early retirement saving, even if you can’t guarantee a specific rate of return. Simply put, the sooner you start saving for retirement, the more money you’ll have—by an exponential factor—and the less money you’ll need to put into your investments. Therefore, starting your investment journey early allows you to benefit from the power of compounding.

What are the viable options for investment for retirement?

  • Mutual funds are one of the best private retirement plans available. These are capable of generating annual returns of 12 percent to 15%. You will also benefit from the power of compounding when you invest with a long-term horizon.
  • Investing in rental properties is also a great source of earning periodic income pre and post-retirement.

What are some other examples of unexpected expenses?

Car repair bills, medical expenses, annual insurance premiums, gifts and special events, athletic fees, and activity enrollment costs are only a few examples of unanticipated or lump sum expenses that can occur during the year.

How should one handle unexpected expenses?

  • Have an extra stream of earning that can provide you with an immediate emergency fund, should you require it.
  • Analyse your current expenditures and consider increasing your savings post retirement.
  • Seek financial advice from professionals on how to anticipate and mitigate unforeseen risks.
  • Invest in avenues that offer monthly payments such as real estate and dividend paying stocks.
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