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This Is The Biggest Risk Post-Retirement, Learn How To Deal With It
Sep 25, 2017

Which of these is potentially the biggest risk post-retirement?

  • Inflation
  • Stock market crash
  • Longevity (outliving your retirement corpus)
  • The human brain

Take your time. Read the options carefully.

Once you have locked your answer, match it with the correct option below.

Don't stress; this isn't the Rs 7 crore Jackpot question on 'Kaun Banega Crorepati'.

Nonetheless, the correct answer will certainly help protect your retirement corpus, which could amount to lakhs or crores of rupees.

And the correct answer is....

Not 'A'. Inflation is a risk, but one can deal with it by investing in inflation-beating financial products.

If you answered 'B', this answer is incorrect as well. Post-retirement, you need to reduce your equity exposure and maintain a long-term view. By doing so, a stock market crash will only be a small blip in your portfolio value over the long term.

Many would have answered 'C'. Yes, longevity is a big risk, but it isn't the biggest. There are ways to invest in efficiently rewarding products and manage expenses so that your retirement corpus outlives you.

Yes, 'D' is the correct answer. Not because we as humans tend to give in to our behavioural biases. Though behavioural biases do inhibit our ability to earn efficient returns, you can overcome this by automating investments and sticking to a financial plan.

So then, what other condition affects the human brain that leads to poor investment decisions. Well, it is something that can ruin even the soundest financial plan.

What is it?

Read on to find out...

Have you ever wondered why senior citizens fall for obvious financial mis-selling or scams?

The stories of misselling financial products to retirees are numerous.

There are stories of retirees who have squandered their retirement fund, running into lakhs of rupees, on insurance-cum-investment policies. When the sheen of high-return promises wear off, it's often too late for them or their children to recover from these losses.

Well, the glib talk of the sharp suited and booted wealth relationship managers and the pleasant and slick personal interactions can even trap well-educated youngsters, leave alone our humble seniors. Unfortunately, the sugar-coated advice from these conniving relationship managers often leaves a bitter aftertaste.

Retirees who reside independently are even more vulnerable. Personal interactions are like a breath of fresh air for them. So much so, even when the truth emerges, they are unable to see through the facade.

However, there is a reason why a majority of seniors are unable to sift the truth from the blatant lies being told to them. It's the greater threat for a retirement portfolio that nobody talks about. Something that is even more serious than a stock market crash.

It is diminished cognitive ability or dementia. (If this was the reason you picked option 'D', you are spot on.)

As we age, our risk of developing a form of dementia (loss of mental ability) increases. Studies in the US, show that the rate of cognitive impairment (a lower form of dementia) among those aged 71 to 79 is 16% and among those 80-89 is 29.2%. This impairs cognitive decision-making. Unfortunately, many don't realise they are suffering from it.

Apart from other inhibitions, dementia mainly causes memory disorders, personality changes, and impaired reasoning. None of these symptoms bode well with taking financial decisions.

The result, seniors suffering from a form of dementia often end up taking financial advice at face value. They don't question returns that may seem too good to be true. Understanding risks is a bit too much to ask for.

What's worse, they are completely unaware of a decline in their reasoning ability; and thus, fail to understand the need for a second opinion from their near and dear ones.

A health and retirement study conducted by the University of Michigan found that 60% of retirees in the US, who were experiencing clinical dementia, were still managing their own money.

Another study by Michael Finke, director of retirement planning at Texas Tech University, found that among those who experienced a large decline in cognitive ability, there was a commensurate decline in wealth.

While there is no way to escape the biggest risk in retirement, here's how to manage investments prudently post-retirement:

  1. Keep it simple

    Only a few sets of products are needed to help protect and grow your retirement corpus. Attempting to chase returns by investing in toxic hybrid financial products such as market-linked insurance plans can be detrimental to your financial wealth. Stick to well-known and well-regulated investment avenues such as mutual funds, bank fixed deposits, and government-backed schemes.

  2. Don't mix insurance and investments

    Unit-linked Insurance Plans (ULIPs) or Unit-linked Pension Plans (ULPPs) come with fancy names such as Pension Guarantee, Pension Plus, Retirement Advantage, Smart Pension, Retire Smart, etc. If this isn't enough, insurance agents will try to lure you into buying policies for your grandchildren. However, these products have delivered mediocre returns over the long term. You would have been better-off investing in efficient products such as mutual funds. Hence, it's better to avoid ULIPs or ULPPs for yourself or your loved ones.

  3. Keep all financial records in one place

    As we age, we tend to be forgetful. Insurance policies and long-term securities top the list of the most forgotten investments. Thousands of crores of unclaimed money is lying with insurance companies, mutual funds, corporate houses, banks, and the Employees' Provident Fund Organisation. You surely do not want your hard-earned money to end up there. Thus, organise your financial records prudently. It is important to let your loved ones know where you keep important documents, so that they can find it when needed, lest you forget.

  4. Keep loved ones in the loop before taking large financial decisions

    Salespersons often attract potential clients through limited-period discount or offers. Many times, this leads to rash financial decisions. While the offers may be too good to resist, you need to take a step back and think it through. As a precaution, it is best to keep your near ones informed or seek assistance of a known and trusted person before taking large financial decisions. They will be able to guide you better and help make a prudent choice.

  5. Maintain social interaction

    In the growing trend of nuclear families, many seniors end up living alone. Their children get married and live separately or abroad. Social isolation can contribute to poor health and depression. While retirement can make you feel lost and lonely, there are plenty of ways to stay socially engaged. Such social interactions help boost brain activity and help prevent dementia. Participate in hobbies or volunteer for social activities. These can be richly rewarding experiences that will keep you busy. You can also keep yourself updated and informed of different financial products, which can streamline your retirement portfolio.

We believe these pointers will enable you to live a financially stress-free retirement.

It always helps to keep challenging your mind. Learning new things helps keep you mentally active and engaged.

Unbiased financial knowledge is the key to succeed in achieving all your investment goals before and after retirement. You don't need to go anywhere to gain this knowledge, you can get it right where you are.

Sign up for PersonalFN's comprehensive A to Z e-course to become your own financial planner. This video e-Course is geared to serve as a guide in the serious decisions regarding money matters.

Out of the 8 modules in the course, Module #5 elucidates how to avoid the serious mistakes committed when planning for retirement and to bring order to your future. We have incorporated decades of our knowledge and experience in handling financial dilemmas of a regular investor into this e-Course. Don't miss this opportunity. Subscribe to the e-course now!

If you have a few years to go before retirement, we strongly suggest you sign up to PersonalFN's very popular service - The Retirement Letter. With every monthly issue of The Retirement Letter, we will walk you through the complete journey that leads to a HAPPY and BLISSFUL retirement. In fact, we will you handhold through EVERYTHING that is crucial to plan your dream retirement. And there's much more... subscribe to this service right away and take your first step towards a dream retirement!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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