Thursday, April 20, 2006

Insurance for when things go wrong

The object of the retirement plan was to preserve the desired standard of living during a very lengthy retirement (30 years or more) with the least possible risk of erosion through inflation. The end product was one that requires a larger sum of capital than is often recommended by financial advisers and a different asset allocation as well.

A plan which involves looking more than 40 years into the future (10 plus years of working and 30 plus years of retirement) has the potential to involve a great deal of uncertainty. Things can, and probably will, develop differently from what is currently anticipated. So what should be done if, or when, things go wrong? The comments below are based on the premise that anything which can reasonably be done to economise on living expenses will have been done already.

I previously mentioned three forms of insurance against things going wrong. These are (in order of preference):

1. Employment: while I have made the case for not relying on employment to fund retirement, the possibility of remaining in or returning to the workforce if the need arises can serve as a form of insurance in the case of emergency;

2. Your home: I made the case of owning your primary residence debt free on retirement. The home also serves as a store of wealth that could be tapped, either through a reverse mortgage or a sale, should the need arise. A sale could done either as a move to living in rented accommodation or to a smaller owned residence;

3. Drawdown of capital: I am not a fan of any retirement plan that relies on drawdown of capital to make ends meet - it is too much like hoping that you die before your money runs out. However, if things get tight it can be done. The money is there and it is better to spend the money than to be forced to eat cat food.

So, three back up plans if things get tight. Actually, living in a high cost city like Hong Kong, there is a fourth form of retirement insurance available - we could relocate to a cheaper place to live. Leaving aside the effect of the cost of moving I would expect this to be the least attractive option as it would result in a significant change in our lifestyle and our social circle at a late age in life.

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