Retirees and Risky Business

To continue our series on different types of risks faced by today’s retirees, we need to also spend some time talking about “business risk.” In our context, business risk simply means that a company you rely on for some form of financial support may go out of business. If the company does become bankrupt, then you may lose all or a part of the financial benefits you were expecting to receive.

One resource a retiree may lose is retirement income. Most “defined benefit” plans have federal insurance protecting the benefits. But nowadays not many employers are offering defined benefit plans, which guarantee you a lifetime of income (based on your salary, age at retirement, and years of service).

Instead, most employers now offer “defined contribution” plans, like 401k and 403b plans. The benefits from these plans are not guaranteed. In fact, if a retiree has most of her 401k investments in her company’s stock, then she runs the risk of losing her investment if her company goes bankrupt. So especially for a retiree, investments in your ex-company’s stock should be a small percentage of the overall portfolio. Remember what happened to Enron retirees.

Besides losing your retirement investment in company stock, you can also lose your health benefits if your ex-employer goes out of business (or is bought out by another company). Once you reach age 65, this risk may not be too much of a concern, because you’ll be eligible for Medicare. But for early retirees, losing company health benefits can be a significant shock to your budget if you have to suddenly buy health insurance on your own.

Another business risk a retiree may face concerns annuities. Annuities promise guaranteed income for life, but that promise is only as good as the insurance company behind it. If the insurer goes bankrupt, there are state-run guarantee funds designed to protect retirees, up to certain limits (depending on the state). So if you have more than that limit amount in an annuity at one company, you may want to spread out your investment among several different insurers. It’s the same idea as spreading out your bank accounts to stay under the $250,000 FDIC insurance limits.

In general, to minimize the affects of business risk for a retiree, a good strategy is to avoid “putting all your eggs in one basket,” which can also help you maximize your retirement readiness. Diversification works well for your investments and against business risk too.

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About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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