The Seven Major Retirement Threats

Chances are, if you save regularly and invest properly, you will be able to meet your retirement goals on schedule. But this is not always the case. Any number of problems could crop up before or during your retirement and seriously hinder your plans. Medical, employment, parental care, and marital problems are among the most common sources of major retirement planning setbacks. Quite often, these unforeseen problems can be a particularly significant stumbling block for those who have postponed saving for retirement until late in the game. In some cases, it is possible to plan ahead to minimize the damage from these troubling developments; in others, the best you can do is to roll with the punches. In this article, we shall present some of the most serious threats to your retirement plans, as well as specific steps to take either in defense against such eventualities, or in response to them.

7 Main Threats To Your Retirement

1.  Major Health Problems

Few things can absorb a lifetime's worth of retirement savings than a prolong stay in a hospital. Major medical problems such as heart diseases or cancer can put your retirement savings at risk whether they occur prior to or during retirement. Fortunately, most people will never need an extended stay in a hospital but for those who do, the costs can be devastating: a complicated by-pass surgery can cost up to Baht 1 mm. and an extended stay in the ICU can cost several hundreds of thousands Baht.

Preventive Measures.

Although, health insurance can help to provide coverage but unfortunately most policies do not cover those over 65 years of age, the threshold of which, you are likely to need health insurance the most. Many employers provide group health insurance for their staffs but the vast majority does not. Therefore, those who are not covered by employer's policy should seriously consider purchasing a policy on their own, despite the potential high cost. In addition to health insurance, there are many other types of insurance that can play an important role in safeguarding your retirement savings such as homeowner insurance, car insurance and life insurance . Please go to Wealth Protection page for more stories on the various types of insurance policies.

2. Parents in Need

Another common threat to retirement savings is a conflicting financial need that suddenly appears and absorbs the money meant to fund retirement. Fortunately, it is usually possible to see the big expenses coming. School fees, for example, typically comes with 18 years of warning when the child is born! But one major expense that often takes retirement savers by surprise is the need to help “needy” parents finance their own retirement. Increasing life spans bring with them the increased chance that parents will outlive their retirement savings or perhaps you are unlucky enough to have parents who simply did not save as responsibly as they should have. Most grateful adult children will want to help their parents as best they can but the key is to do so without doing serious harm to your own retirement in the process.

Suggested Solutions

Naturally, one solution is to give your parents money, but this might not be the best solution to the problem from their perspective or yours. Better to start by addressing your parents' expenses to see if there's any way to help without spending the money meant for your own retirement savings:

•  Find out as soon as possible if your parents will need your financial assistance; the problem will be far worse if you don't have time to prepare. This can be a sensitive issue since many people of older generations do not believe that it's proper to discuss money with one's children, much less ask for help.

•  If your parents depend heavily on a pension or provident fund lump sum for their income, find out how the post-retirement lump sum is being invested. When people retire, they are not likely to spend the whole lump sum from day one, therefore, it can be invested for many more years.

•  Have a parent or parents move in with you. But whether or not this is a workable solution depends to a great degree on how well members of the family get along with each other, and how much extra room you have in your home. But it can be a great way to free up money from housing costs. If your parents own their home, they might sell it to raise capital or they could do a reverse mortgage, and continue to live in their own home.

•  Reverse Mortgages: Although, not yet available in Thailand but it is a concept that may one day be introduced here. Essentially a reverse mortgage is a way to tap the equity that you have accumulated in your home without selling it and moving out. Since many retirees own homes worth considerable amounts of money, this can be a valuable tool especially for those who find that their retirement savings are coming up short. A retired homeowner takes a loan based on the value of the home. A bank, or some other lender, then makes monthly payments to the homeowner, often for the remainder of the homeowner's life. Meanwhile, the home's occupant will not be required to give up the right to the home so long as the owner is still alive and does sell the home or move away. (with married couples, reverse mortgages typically allow continued residence as long as at least one spouse remains.) When the homeowner dies, the bank will take possession of the home, unless the heirs pay off the loan including interest.

Thus, a reverse mortgage generally means that the home cannot be passed on to the next generation. Under no circumstances will you or your heirs owe more than the value of the home. However, it's worth pointing out that the payments offered by reverse mortgages are unlikely to adjust upward with inflation and the homeowner is responsible for maintaining the home. Moreover, those considering reverse mortgages must proceed with care. Their arrangements' complex nature and potentially high fees have allowed some unscrupulous operators to trick senior citizens into unfavourable reverse mortgages.

•  Although, this may sound a bit selfish but under no circumstances should you allow other financial goals to crowd out your retirement savings entirely. Otherwise, you will just wind up in the same position as your parents.

3. Job Loss

A long period of unemployment can force even the most dedicated retirement saver not only to stop saving, but to dip into the savings that already have been accumulated. The first thing to do is plan ahead to help lessen the blow if you are laid off:

•  Set aside an emergency fund large enough cover your expenses for 3-6 months. This way, you won't have to dip into your retirement accounts to pay the bills.

•  Don't leave retirement savings until late in your career. Unemployment might make it impossible to play catch up.

•  Keep a resume updated and be open to other opportunities, even if you have no plans to change jobs. Such advance planning can give you a jump start on other job seekers in the event of large scale layoffs like the 1997 crisis.

•  Even if things do not work out as plan and you find yourself out of a job, or in a lower-paying job with retirement on the horizon, you may consider whether you can retire early. This is assuming that you have sufficient savings, or you are willing to live frugally during retirement and your company offers an attractive severance package.

•  Another option is to delay your retirement to make up for the lower rate of savings or lower provident fund benefits provided by your new position. An extra year or two of income together with a year or two less of living off retirement savings could be enough to make up the difference.

•  If there is an upside to periods of unemployment, it's that they help some people to discover that they can live on a significantly lower budget than they had in the past. Re-evaluate your budget both your current and projected retirement budget. Eliminate unnecessary expenses and perhaps you will find you are just as happy without some of these items.

•  Lastly make sure that you still have the necessary insurance coverage in your new job or during your period of unemployment.

4.  Divorce

If you have planned for retirement as part of a married couple, suddenly becoming single can have a very significant impact both in terms of your plans and your finances. To begin with, it is more expensive for two people to live apart than it is for them to live together. Housing costs will rise, and many other expenses are likely to climb as well. Divorce is also likely to effect your retirement savings. Some spouses lose a large portion of their accumulated assets in divorce settlements, and the legal bills involved in the process can cut into savings as well

Based on National Center for Health Statistics, slightly more than 50% of all marriages in the US will end in divorce. As of the early 1990s, the average age for a first divorce for men was 35, for women, 33. Those who divorce late in life are even more likely to see the divorce have a substantial impact on their ability to afford a comfortable retirement. Additionally, expect your ability to save to be diminished due to: the increased cost of living separately prior to retirement, alimony payments, child care expenses etc. Divorces can get to be very complicated from a financial stand point, and most people would be well served to consult with a tax lawyer or a financial advisor during the process. (For more on this topic, please go to Personal Finance page). 

5.  Inflated Inflation & Low Interest Rates

Inflation is retirees' worst enemy, eating away at the value of their assets and their standard of living. Although, no one thinks Thailand will end up like Argentina during the 1980s, where hyperinflation devastated society but with a headline inflation of 5.2% during the first seven months of 2005, while bank deposits still offer a paltry 2.5%, many retirees are already drowning. A monthly pension income of Baht 120,000 will buy only Baht 82,000 worth of goods in 10 years time, assuming 3.5% inflation. At 4.5% inflation, that number falls to Baht 74,000. At 5.5%, it's Baht 66,600, almost half the original amount! To add salt to injury, the current negative interest rate i.e. lower than the rate of inflation, will make life doubly tough for retirees trying to live off their savings.

How do you cope with high inflation and low interest rates? There are no easy ways to cope but for one thing, don't be afraid of stocks, which tend to outpace it in the long run. The other remedy is to save more money. Dividend-paying stocks also offer some relief. Many financially strong companies are yielding 3-4%, or more. But at the end of the day, the most important thing you can do is to be realistic when developing a financial plan about how much money you will need to maintain your standard of living in retirement.

6.  Volatile Stock Returns

One of the most feared retirement setbacks is stock market meltdowns but such fears may be overblown for two reasons:

•  Portfolio diversification . Wise investors close to retirement age have diversified portfolios that are invested in bonds and foreign stocks, not just domestic stocks. True, a stock market collapse might drag other investment categories down along with equities, but often not to the same degree, which can help cushion the blow.

•  Long time horizon – even at age 65 . Most people don't need all of their savings the day they retire. Therefore, even at the age of 65, most of your money will still remain invested for years, since your retirement could well last 15 to 25 years. And since stocks have historically rebounded over such extended period of time, the odds are good that most of your investments will be able to recover.

7. Longer Lives

A generation ago, the typical American who retired at 65 would keel over at 78. Today, a 65-year old man is far more likely to live to 82. His 65-year old female counterpart is living longer too at 85. That's not such great news for our retirement plans, however. The longer we live, the more money we need. Women are at particular risk. Not only do members of the allegedly weaker sex outlive men by several years, but they are at the top of the demographic charts when it comes to reaching really old age: two-thirds of the over 85 set are female. But because women tend to have more fractured work histories, they are twice as likely to work part-time, and make less money when they do work. As a result their retirement savings are much thinner. Moreover, young women (ages 21 to 34) are also more likely to carry more debt. To be safer, both men and women should save and invest as though they will live to, say, 95 rather than 85.