Retirement at risk?

Column published in the December 2022 edition of Bilan – Albert Gallegos, Director of Wealth Management

Retirement is certainly one of the stages of life, when a person is financially most vulnerable, as there are few options available to compensate for a possible lack of income.


The longevity risk refers to the possibility of living beyond the assumed average statistical age. This risk must be accounted for. Indeed, a man is expected to live to the age of 81.6 years old and a woman to the age 85.7 years old. For the pension system (1st and 2nd pillars), the longevity risk represents the risk of underestimating the survival rate, resulting in higher liabilities to cover future retirement pensions. In view of this fact, pension funds prefer the disbursement of a lump sum rather than a pension! However, insured persons opting for the payment of a lump sum will need to plan for sufficient additional savings to maintain an adequate level of income until the end of their lives.


A general increase in the price of goods and services is another risk. The consumer price index (CPI) is used to measure this increase. When the CPI increases, the purchasing power of retired people decreases. The inflation rate for October 2022 was 3.0%, compared to the same month in 2021. As of February 2023, AVS and invalidity pensions will be adjusted to the development of prices and salaries and will be increased by 2.5%. According to the OPA (Occupational Pensions Act), the Federal Council provides for the adjustment of minimum pensions in the case of death or invalidity. In the case of old-age pensions, however, it is up to the pension funds to decide according to their financial situation. In view of the fact that 2022 was not a good year for the 2nd pillar with a loss of approx. 10%, a pension increase is not planned for 2023. As a result, it is advisable to proceed cautiously and plan appropriately when considering a pay-out of the pension capital. A good pay-out strategy is one of the keys to managing inflation risk.


There is no magic formula

It is also essential to consider the income risk when planning for retirement. This risk is directly related to the inherent uncertainty in terms of returns on investments. Financial planning involves investing of funds during one’s working life, to be able to use them during retirement. All financial products involve a certain risk, and investors must adapt their strategy to the respective risk level. In this context, the generally accepted principle is that the longer the investment horizon, the more advantageous a growth strategy, i.e. a strategy with a focus on equities, becomes.


The liquidity risk refers to the ability to dispose of available funds to fulfil short-term necessities. The risk resides in the fact that an investment might have to be sold at an inconvenient and/or unexpected point in time. As an example, just bear in mind that a 100% investment in equities made at the beginning of 2022 would have resulted in a loss of approximately 20% by November of the same year. The higher the rate of liquidity of a portfolio (equities, bonds, savings accounts, etc.), the easier it is to recover the funds. On the other hand, an investment in assets that are complex and difficult to sell (real estate, private equity, etc.) offers less liquidity. Liquidity risk must be considered when developing a pay-out strategy and, in more general terms, as part of individual financial planning. To assess all financial risks in connection with retirement is key!



Disclaimer : This is a free translation of the French original version. In case of discrepancy, the French version shall prevai