How to Plan for Risk in Retirement

November 22, 2016

The Rocket Science of Risk Management

When we take a look at the historical feats that NASA has been able to accomplish, from putting a man on the moon to capturing images from Mars, one of the biggest reasons that these missions have succeeded is because of top-notch risk management.

By NASA’s standards, this means identifying risks (or threats to a mission), and then taking steps to prevent them.

Savvy risk management requires keen powers of observation and anticipation—and continuous out of the box thinking. Although you may not be trying to pull off a lunar landing, this kind of preemptive approach is what’s necessary to keep your finances intact throughout your retirement.

Looking at Your Risk Evolution

In our day-to-day lives, we face some degree of risk with just about every decision we make. When it comes to retirement and investing, it’s not entirely about avoiding sudden downturns in the market—there will always be some factors over which we have no control—it’s about identifying and calculating likely or possible threats, and then trying to mitigate them through informed decision making and preparation.

This is risk management.

Some risks can be managed with insurance. For example, the potentially devastating impact of the early death of a family’s main income earner can be (at least financially) lessened by the purchase of life insurance. Yet as we transition from our asset accumulation stage to our retirement years, our risks evolve. Once the kids are grown and the house is paid for, the need for life insurance should decline. Simply, the risks we need to manage in our younger years are likely quite different from the risks we need to manage in our retirement years.

The Risk of Shared Accounts

I’ve seen many situations where retirees will try to make things easier for their children by listing them as joint owners on bank accounts or other assets. This is often done to simplify the transfer of assets in the event of the death of the parent, or to make it easier for the child to pay bills in the event of the incapacitation of the parent.

But listing a child as a joint owner on a bank account or mortgage can be a terrible mistake. What most people fail to consider is that bank accounts are subject to any creditors any of the account’s owners may have now or in the future. This can include lawsuits, unpaid alimony, medical bills, and even taxes. I’ve actually seen an elderly woman evicted from her home because the son she had placed on her mortgage hadn’t paid taxes in 10 years.

Uncommon Insurance to Consider

There are more insurable risks than you might realize. (Which is what a qualified, credentialed advisor can help you understand.) Most likely, you’ve accumulated a nest egg for yourself in the form of savings, investments, home ownership, etc. But beyond homeowners’ insurance and medical insurance, there are plenty of other lesser-known types of insurance (umbrella policies, for one) that can make all the difference when it comes to protecting what you’ve earned and the people you love.

What you need to do is take a clear, hard look at what you have, and then evaluate how you can protect your assets over the long haul. While some people are able to self-insure, you will probably require some level of protection, so whether it’s liability insurance, umbrella insurance, or long-term care insurance, speak with a financial advisor to determine what is the right amount (and type) of coverage for you.

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