Retirement planning: Five major risks you should be prepared for

A large enough corpus at the time of retiring is a comforting factor for many. However, it may not be an assurance of financial stability. Even though you may have a retirement corpus in place, the question to ask is whether the amount that you have in hand will match your needs? There are various risks during retirement years that you might not calculate or plan for.

Here are a few of those risks you should keep in mind while doing your retirement planning.

Rising inflation

Inflation eats into your purchasing power as it has started doing now. The purchasing power of your corpus will go down with inflation. “Failing to appreciate the effects of inflation and planning one’s corpus is a big risk during retirement years.” Suresh Sadagopan, Founder, Ladder7 Financial Advisories, said.

To overcome this, a small allocation to equities can be of help since stocks can beat inflation in the long run. Investments in diversified equity funds or index funds can be considered. If you want to cut down on volatility and still want to invest in equities then you can also consider some investments in balanced advantage funds which invest in a mix of stocks and bonds.

Falling interest rates

Interest rates are dynamic and you will be among the unlucky ones if you retire at a time when the rates are down or at rock bottom. “Falling interest rates on fixed income investments will remain a risk for retirees. There is also a reinvestment risk, which means risk of interest/income rates going lower at every maturity date for investments in the retirement corpus,” Arvind Rao,  Founder, Arvind Rao and Associates, said.

Improper investment choices

If you have been a risk taker on your investment during your younger days, you must gradually curtail your risk-taking instincts as you near your retirement. Larger amount of money should be moved into less riskier assets such as fixed income. Fixed income instruments should ideally constitute a large chunk of your retirement investment corpus. “One of the major risks that a retiree faces is that of capital erosion due to wrong investment choices or risky investments,” Sadagopan said. An equity heavy portfolio runs the risk of huge erosion if the stock market slides around the time you retire or during your retirement years.

Living longer

With better healthcare facilities, people are living longer and one has to prepare a retirement corpus for more years. “Living longer than what one has planned for financially, is a risk. It is better to be prepared for this,” Rao pointed out. When you retire, you should keep a time horizon of at least 20 years of retired life if not more. Here too investing in equities comes handy. If you have at least 10 percent of your retirement corpus in stocks it can help you maintain the same level of lifestyle as earlier.

Unexpected illness in family

Health insurance is difficult to acquire at old age. Buy it as early as you can. If you and your spouse have not bought it yet, better buy it now. If you are retired and not getting health insurance or getting it at a high premium, do go for a policy with some co-pay condition that lets you have some insurance cover. An illness can put a large hole in your pocket. “Rising medical costs coupled with rising premiums of health insurance policies is a big risk for senior citizens,” Rao said.

You may create some dedicated healthcare fund for yourself before you retire. Such a fund can be a part of an enhanced emergency fund and can be tapped for healthcare needs which are not covered by health insurance.