Planning Matters (September 2018) – Risk Management and Retirement Planning

by David Cechanowicz, JD, MSFS, AIF®, AEP, AE – Senior Financial Planner
REDW Stanley Financial Advisors, LLC

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Last quarter, this newsletter focused on the Retirement Planning section of REDW Stanley’s Wealth Management map. We looked at the inter-relationships between various aspects of financial planning and how retirement planning can span decades and often dominate other planning goals.

The Wealth Management map covers four primary planning areas: Business Planning, Estate Planning, Retirement Planning and Investment Planning, or Asset Management.

At the bottom of the diagram are three additional sections we refer to as the lenses through which we view the decisions that are made in the main planning areas. Because we at REDW Stanley are fiduciaries, we must first act in our client’s best interest. Then we measure and account for the tax impact of planning decisions, and finally, we factor in how those decisions affect risk.

Risk Management is defined by Wikipedia as the “identification, evaluation and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.”

Note that Risk Management not only focuses on preventing loss, but also looks to maximize opportunities.

Responses to Risk

When risk is considered, the following are possible responses to risk, some of which can be combined, such as accept, reduce and transfer:

  • Accept – continue without any changes to mitigate or exploit the risk.
  • Ignore – perhaps thinking it can’t happen to me, or it’s not likely ever to happen. Ignoring the risk eliminates the ability to transfer, avoid or otherwise reduce the risk.
  • Avoid – by taking action that will allow you not to encounter the risk at all.
  • Exploit – use the situation to your advantage, as long as the risk and all of its ramifications are understood.
  • Reduce – by placing policies or procedures in place to make the risk less likely.
  • Transfer – typically involves the use of insurance and the payments of premiums to a third party. When a risk is not covered by insurance, the reality is that the risk is self-insured. In other words, the cost of the loss must be absorbed completely by the individual or company that had an opportunity to transfer all or some of the risk, but chose not to.

One university course designed for retirement planning lists 27 different risks that they suggest retirees could face, in one form or another. As I looked over all of the different risks, I tried to find the larger themes that might affect retirees. My consolidated list is much shorter and categorizes everything down into just two areas: health and wealth.

So how does one approach the issues of risks in retirement? The first step is to understand the risks that can have the most dramatic impact on one’s economic future, including premature death. For most of us, the big three in the health area involve a major medical event, premature death and the possibility of prolonged long-term care expenses.

On the financial side, one of the biggest fears in retirement is the thought of running out of money and having to depend on others, especially children, for assistance. A larger question to consider is whether or not an individual’s investment portfolio is structured for the amount of risk that can be tolerated. Additionally, are the assets diversified to equal the risk level that is appropriate?

With all of the potential risks that are out there, what steps can an individual or a family do to deal with them? To begin, prior to retirement, people need to focus on financial planning and do the analysis as to whether or not there will be enough money to maintain their desired lifestyle. For more than 15 years the Society of Actuaries has been studying the approach that pre-retirees and retirees take to the management of risk, financial planning, and the decision-making process that surrounds planning for retirement.

Their 2005 study found that many did little financial planning or analysis before deciding to retire. A recent nationwide study also found that 83% of all Social Security claimants did so without the help of a financial advisor. In 2013 the Society of Actuaries decided to look into the issue in greater depth and created focus groups to study those who chose to retire and had modest assets and income. Their study results of 2005 were validated as the new groups found “a notable lack of planning” by those who had entered retirement. After 10 years of retirement, their main approach to the management of risk was: a) do little planning, and b) modify spending as their major financial planning tool.

© S. Harris/New Yorker

The good news is that, barring significant financial disasters, the survey suggested that most of the individuals adjusted well to their financial circumstances in retirement. While that is good to know, we are confident there is nothing that will give more peace of mind than a financial plan that is created before retirement and is monitored throughout the years.

The REDW Stanley Financial Advisors team stands ready to help you with all of your planning needs, especially in the creation of or review of your retirement income plan. Additionally, we have members who have extensive experience with risk products such as life and disability insurance, long-term care insurance and annuities. If someone is suggesting that you transfer risk through the use of some product or another, please give us a call and we can discuss how any given product can fit into your overall financial planning needs in retirement

Remember, if it costs you peace of mind, the price is too high. Good planning is the foundation of your peace of mind, which, in the end, is priceless.

Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.