The last article in this series covers the remaining major risks that can affect planning for retirement.
We have already covered market risk, purchasing power risk, business risk, and sequencing risk.
Some of the other major risks include the following.
Liquidity risk
- What it is – This refers to the possibility that an investor may not be able to buy or sell an investment as and when desired, in sufficient quantities.
- What people say – ‘I’m asset rich but cash poor’
- Example – A retiree could own a significant amount of property, but if they have vacancies for an extended period of time, they could be forced to sell a property in a ‘fire sale’ to meet their income needs.
Legislative risk
- What it is – Unfavourable government action or social changes resulting in a loss of value. Usually in the developed world this is due to changes to taxation rules.
- What people say – ‘I’m worried that I won’t be allowed to access my super when I get to age 60’.
- Example – While planning for retirement, a person may have left more cash outside superannuation, thinking that they could make after tax contributions of $180,000 per year over the last few years of their working life. Some of this may now be ‘stuck’ outside super due to the reduction of this limit to $100,000 per year, resulting in increased tax payable in retirement.
It’s important to note that we have only discussed 6 of the major risks. And some of these risks discussed involve trying to predict what will happen in the future, which can be impossible. However, knowing these risks exist is the first step in coming up with a plan to make the best decisions possible for you. Written by Dallas Davison.