Why Think About Risk?
When it comes to planning retirement, managing risk is paramount, as we cease earning income and our livelihood comes from pensions and invested assets.
A sound plan must examine each of the potential risks that can occur: market, longevity, inflation, health care costs, early death and many others.
In the last decade, great emphasis has been put on risk management in every area of our lives.
Risk management provides a framework around which we can make decisions.
When assessing risk, we determine its likelihood and magnitude. Armed with this information we can decide whether we
want to apply techniques to reduce, eliminate, transfer risk, or retain it.
Risk Management Framework
A risk management framework consists of the following elements:
- Identify, characterize, and assess threats,
- Assess the vulnerability to specific threats,
- Determine the risk (i.e. the expected consequences of each threat),
- Identify ways to reduce those risks, and
- Prioritize risk reduction measures.
Risks must be assessed as to their potential severity of loss and to the probability of occurrence.
Perhaps the most widely accepted formula for risk quantification is:
Risk = Rate of occurrence X impact of the event
Three approaches can be used to assess post-retirement risks:
- Determining the odds for the occurrence,
- Gauging the impact of an occurrence with stress testing, or
- Evaluating the impact of a risk to a moderate change in outcome using sensitivity testing.
Potential Risk Treatments
Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:
- Avoidance (eliminate)
- Reduction (mitigate or control)
- Transfer (outsource or insure)
- Retention (accept and budget)
Some risks fall in a "qualitative" category as to their treatment.
All risks that are not avoided or transferred are retained by default. Some approaches to managing risk fall into multiple categories.
Risk management plan
A risk management plan summarizes the approaches selected for managing the risks and documents the decisions
Implementation means following all of the planned methods for mitigating the effect of the risks,
purchasing insurance policies for the risks that have been decided to be transferred to an insurer,
avoiding all risks that can be avoided, reducing others and retaining the rest.
Review and evaluation of the plan
Risk analysis results and management plans should be updated periodically to evaluate whether the approaches are still
applicable and effective, and to determine any changes in the possible risk level.
Here's a list of the most important post-retirement risks:
- Interest rate
- Sequence of returns
- Stock Market
- Loss of spouse
- Declining health
- Medical costs
- Employment risk
- Unforeseen expenses
- Estate preservation
There are also pre-retirement risks, such as loss of employment, declining health that forces early retirement, disability, death of spouse, stock market and unforeseen expenses.
The rates and amounts page provides current information on the Canadian public pension programs and retirement savings limits.
The retirement planning primer provides general information on retirement planning and the glossary brief explanations of investment, tax and retirement planning terms.
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