You’ve worked hard to get where you are today. A lot of time and money has been invested in your work and your relationships. I’m assuming you also have big plans for the future but are concerned about making sure you and your family stay-on-track in the event of any of life’s unexpected events.
So, what could happen? How would it impact you and your family? What are the chances? And, how can you establish solid financial foundations to protect you?
Well, unfortunately, there are many things that could put you, your family, your current assets or your ability to achieve your goals at risk.
Here’s a breakdown of the main risks with examples of the impact, the possibility of it happening and potential ways to protect against it:
- Inflation Risk.
- The rising cost of living.
- For example, if we do not take inflation into consideration the income you plan to have in retirement will not be enough and your super will run out sooner as everything becomes more expensive.
- The risk of this happening is practically 100% as we very rarely experience deflation, or prices coming down.
- To protect against inflation risk we need to ensure that we invest in assets that tend to grow in value as prices increases, like property or shares.
- Market Risk.
- The risk of your wealth decreasing in value before you need it.
- For example, during the 2008 Global Financial Crisis, many people experienced as much as a 50% drop in the value of their superannuation, just before they were due to retire, forcing them to continue working to support their lifestyle.
- It’s hard to say if we will experience something on this grand scale ever again, but as evidenced with the recent decline in property prices, future market risk to some degree is inevitable.
- To protect against market risk we need to move existing wealth to more conservative assets like term deposit or fixed interest bonds. We can also invest or ‘cash-in’ the assets in stages to average out changes in market value.
- Exchange Rate Risk.
- Similar to market risk. The risk of overseas assets losing value when being brought home.
- For example, most superannuation funds have at least 40% of their assets invested overseas, if the Australian Dollar suddenly became stronger compared to other currencies, your overseas wealth would ‘buy’ fewer Australian Dollars when being repatriated.
- Most of the countries where your money is invested have ‘floating’ exchange rates determined by market forces. Exchange rate risk is therefore inevitable.
- To protect against exchange rate risk we need to try and time the repatriation of wealth correctly, and possibly bring it back in stages to average out changes in the exchange rate.
- Legislative Risk.
- The risk of the Government changing the rules and ‘moving-the-goal-post’.
- For example, we have experienced many changes in the rules surrounding superannuation, impacting the amount we can put in, the tax deductibility of the contributions, when we can access it and how much will be tax-free in retirement. There have also been many discussions around changes to negative-gearing and Capital Gains Tax.
- Successive Governments are always changing the rules.
- To protect against legislative risk we need to take advantage of any ‘grandfathering’ arrangements where possible and ensure we keep everything flexibility enough to adapt to change.
- Litigation Risk
- The risk of being sued.
- This could include divorce or separation, someone contesting either your will or your inheritance, or somebody coming after your assets to satisfy a legal claim.
- 30% of first-time marriages and 60% of second time marriages end in divorce. However, you don’t have to married to be impacted financially as you are deemed be in a de-facto relationship once you have been living together for 2 years; so the separation statistics are a lot higher.
- Instruments used to protect against the litigation risk include professional indemnity insurance, public liability insurance, trusts, wills, attorneys and legally binding agreements.
- Longevity Risk
- The risk of outliving your assets.
- According to the Australian Bureau of Statistics, people born in Australia in the mid-1930’s typically started working before age 18, retired at 60 and died at 63.5 (men) or 67.1 (women). Fast forward 80 years and a boy born between 2014 and 2016 has a life expectancy of 80.4 years and a girl 84.6 years. Our working lives are similar in length but the time we enjoy in retirement has increased ten-fold. So we need to invest more while working to have enough money to last our retirement.
- To protect against running out of funds we should plan early and invest wisely to ensure your money works harder for longer.
- Loss of Income
- The risk of losing your savings, your investments or even your home, as well as your ability to achieve future goals as a result of redundancy, illness, disability or death.
- Figures from the Australian Institute of Health and Welfare state that 1 in 5 Australians have a disability and 1 in 3 of us die prematurely of either cancer, heart attacks or mental illness.
- To protect against the problems caused by either short-term or long-term gaps in our income, we should have access to an emergency fund of ideally 3 to 6 months income and have adequate levels of life insurance, disability insurance, critical illness insurance and income protection.
I hope this articles helps highlight some of the risks that can impact your ability to achieve your goals and what you can do to protect you and your family.