Risk Exposures During Early Retirement Stage

Early retirement, typically around age 65, marks a significant life transition. Clients in this stage aim to stop working and begin utilizing their accumulated financial resources for their lifestyle needs. Advisors should maintain up-to-date records as clients in early retirement often possess substantial financial wealth and no expected earned income.

Common Goals

Clients in the retirement stage usually share common financial goals, including:

• Ensuring a comfortable, predictable retirement income.
• Preventing outliving their assets.
• Preserving the purchasing power of their retirement income.
• Providing ongoing financial support for family members.
• Leaving an inheritance for their children.
• Pursuing philanthropic endeavors.
• Assisting their children in buying their first property.

Disability Insurance Coverage

With zero remaining human capital upon retirement, clients no longer require life or disability insurance coverage. This decision reduces insurance premiums and simplifies their financial situation.

Pensions

Clients with employer or private pension schemes must make informed decisions:

• Purchase annuities for a lifetime income stream.
• Opt for lump-sum withdrawals.
• Keep funds invested in the retirement schemes.

The choice depends on individual circumstances and local regulations. Annuities mitigate longevity risk, offering income for life, including mortality credits for those who live longer than average. Tax advantages and other factors should be considered based on the case's specifics.

The choice of pension options depends on individual circumstances and local laws. The exam provides case-specific details crucial for optimal recommendations.

Annuities address longevity risk by offering lifetime income, including a potential “mortality credit” for those with longer lifespans. Such unique circumstances must be considered in pension recommendations. Case facts may also highlight favorable tax treatment for lump sum withdrawals or retaining invested funds.

Income Planning

To plan retirement income, advisors must identify all expected income sources and their annual amounts. Additionally, taxes, typically around 23%, should be factored into the calculations.

$$ \small{\begin{array}{lr}
\textbf{Retirement Income Proposal} & \bf{\text{Amount } (\$)} \\ \hline
\text{State pension wife} & 42,000 \\
\text{State pension husband} & {54,000} \\
\text{Total pretax income from state pension} & \overline{\bf{96,000}} \\
{\text{Annuity purchased using 75% of wife’s private pension plan}} & 60,000 \\
{\text{Annuity purchased using 75% of husband’s private pension plan}} & {15,000 } \\
\text{Total pretax income from pensions/annuities} & \overline{\bf{171,000}} \\
\text{Less tax} & {21,600} \\
\text{After-tax income} & \overline{\bf{149,400}} \\ \hline
\end{array}} $$

This exercise helps clients assess their retirement readiness. In retirement, some expenses, like commuting and disability insurance, tend to decrease, allowing for potentially lower living costs. It's important to note that the example doesn't consider income from investment portfolios, like stocks and bonds, which retirees often rely on. Taxes should be factored in for these income sources, similar to pensions.

Retiring and Relocating to Other Jurisdictions

Clients often consider moving to a new place after retiring, which can have various implications:

• Consult a tax expert to verify claimed tax advantages.
• Understand estate planning laws in the new country and the home country.
• Assess the tax system in terms of income and estate taxes.
• Consider the option of returning to the home country later.
• Manage currency risk if the new country uses a different currency.
• Arrange efficient and cost-effective money transfers and currency conversion if necessary.

Question

Which of the following is not a common goal for the early retirement phase?

1. Develop and protect earning power/human capital.
2. Maintain the purchasing power of retirement income.
3. Avoid longevity risk.

Solution

The correct answer is A.

Goals A and C are typical for early retirement, while goal B is also common but is more associated with the career development stage.

Reading 15: Case Study in Risk Management – Private Wealth

Los 15 (g) Identify and analyze a family's risk exposures during the early retirement stage

Los 15 (h) Recommend and justify a plan to manage risks to an individual’s retirement lifestyle goals