This is part one of a three-part series on retirement planning and investing for retirement that will be delivered over the next couple of weeks.

“It is always wise to look ahead, but difficult to look further than you can see.”

- Winston Churchill

As we run around shopping for Christmas and planning for the festive season I’m pretty sure no one is really spending time considering their financial future. If they are they are probably considering how they are going to pay off the credit card debt that they racked up shopping. This is probably one of the biggest obstacles of retirement planning — there never is a good time to consider it.

It never seems to have urgency when compared to the constant action of present life. Unfortunately, it is a very important aspect of one’s life to plan and consider. Without action in the present and a solid roadmap that considers myriad aspects, retirement can be disappointing for some or even unattainable.

Over the next couple of weeks I will cover a few basic aspects of saving for retirement and risks that retired individuals and those planning for retirement should consider and work with their financial adviser to address and plan for.

We’ll start with a brief overview of the scale of the potential problems facing people who are currently saving for retirement as well as some non-market retirement risks we all should address. In part two, we’ll go through some market related risks and in part three we will talk about some myths in retirement planning.

If I haven’t got your interest yet, let me scare you a bit. Recently Laurence Fink, the chief executive officer of Blackrock, stated how many people don’t understand what money they’ll need, or how retirement programme cuts may affect them in later years. He points to a “retirement crisis” in the US.

His concern seems well founded:

­— Despite the rebound in the market and economy, a recent retirement study by Fidelity suggests “More than half of Americans are at risk of not covering essential expenses in retirement” (http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-unveils-new-retirement-preparedness-measure ). The younger generations are actually doing worse. Gen X savers are on a path to meet just 71 percent of their costs but Gen Y savers are on track to only cover 62 percent of their retirement costs even after taking into account their much longer time horizon.

— The report from the National Center for Retirement at Boston College suggests that 53 percent of households will not be able to maintain their standard of living in retirement ( http://crr.bc.edu/special-projects/national-retirement-risk-index/ )

— The National Institute on Retirement Security suggests the US retirement savings deficit is between $6.8 and $14.0 trillion. Some 45 percent, or 38 million working-age households, do not have any retirement account assets. Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement. (http://www.nirsonline.org/index.php?option=com_content&task=view&id=768&Itemid=48 )

I do not have comparable statistics for Bermuda but if you take the total assets held in National Pension Scheme Plans (“NPS”) and approved NPS individual prescribed retirement products you come up with an average of $86,458.33 per member.

Some who have saved for years will have a lot more, some who are just starting, a lot less. Without getting the demographic breakdown on this, it is hard to comment on the scale of the issue in Bermuda but I would probably suggest that it’s not encouraging. It is true that mandatory pension contributions started some 13 years ago and other defined benefit plans have helped to diversify and increase assets but it would seem that this is still a small part of the traditional Bermuda retirement plan. The traditional retirement plan for many Bermudians was to rent out a unit or series of houses to pay for retirement. With the collapse in rents and weak housing market locally this has likely placed pressure on rental income and highlights how important it is to diversify your wealth and assets for retirement.

If your entire or substantial retirement plan revolves around Bermuda real estate or Bermuda assets you are putting yourself in an extremely precarious and risky position. If you are working and your current plan only considers local real estate I would strongly encourage you to diversify. I don’t want to discourage local investment by locals; however, it would be irresponsible to not point out that it is a major risk when your current income and all savings are banking on one economy and one ultimate source of income.

As you can see the shortfall between current savings and future spending needs is potentially quite large. In addition, certain trends such as rising life expectancy and healthcare costs may add to one’s future expected costs. Let’s take a brief look at some of the non-market retirement risks we should all address.

Longevity Risk

The great news is that we are all living longer. Modern science and healthcare is helping extend our lives and offering us better quality of life as well. The bad news is that we are probably going to live longer than we expected and there is a distinct possibility that we may outlive our retirement savings. This risk is called longevity risk.

According to the Census Bureau, the US average life expectancy at birth increased 62 percent from 47.3 years in 1902 to 76.8 in 2000, with expectations it will reach 79.5 by 2020. For individuals, longevity risk is the risk of outliving ones’ assets, resulting in a lower standard of living, reduced care, or a return to employment. For those institutions providing covered individuals with guaranteed retirement income, longevity risk is the risk of underestimating survival rates, resulting in increased liabilities to sufficiently cover promised payments.

Retirement plans need to consider that people may not have the ability to make up any shortfalls later in life. They need to consider and plan for scenarios where the retiree lives to the age of 90 years old, or longer, and they need to consider the increasing healthcare cost that are likely to be incurred with this longer lifespan.

Healthcare Costs

Healthcare premiums continue to rise and the cost of care shows no discernable trend of slowing in Bermuda. Couple this with the “denominator problem” associated with the declining population base on the Island and its likely safe to conclude that escalating healthcare costs need to be factored into any retirement plan.

Two specific factors should be addressed when it comes to care and aging: chronic disease and Alzheimer’s disease and/or related dementias. Chronic diseases generally begin around age 55.

It is highly probable that at some point during retirement one will be faced with the unfortunate factor of dealing with a debilitating condition. A recent UK study suggests that those at age 65 have a disability-free life expectancy of about ten years. So for those of us living to 90, we could be living 15 years with a chronic condition that costs increasing larger co-pays for drugs or other expenses.

Disability can be managed with proper insurance planning and savings. Alzheimer’s and dementia pose a financial risk on retirement in numerous ways. It can lead a client to make decisions that are not in his/her best interests. Advisers and family members need to have contingency plans to deal with this possibility. Power of attorney considerations, trusts and other aspects should be discussed.

Cognitive conditions are likely to be costly as well as they often require full high-level care in nursing homes. John Hopkins University forecast that the global prevalence of Alzheimer’s disease will grow to more than 106 million people by 2050 and 43 percent of people will need high-level care equivalent to that of a nursing home.

Government and Private Pension Programme Risks

In the recent SAGE report the plight of Bermuda’s pensions was summarily discussed: “…the contributory pension scheme on which Bermudians rely for retirement income was $2 billion underfunded as at August 1, 2011. The stark reality is that promises made regarding pensions will have to be broken.”

When planning for retirement it may be a good idea to build in contingencies for reduced benefits or later retirement draw from this programme. Unfortunately, that will likely result in you needing to save a bit more.

The same may need to be considered when assessing defined benefit programmes locally. Many local companies have cut healthcare benefits or eliminated many of them from their plans. They have also closed future defined benefit plans to new entrants so future risk of funding is going to be an individual’s responsibility. Members of defined benefit plans should monitor the financial health of any company they receive benefits from closely as the company’s performance can place your benefits at risk. Just ask pensioners in Detroit.

Retirement planning is crucial for a successful future. We can’t continually push off dealing with developing a plan and savings process just to “live in the moment”. Financial responsibility is paramount for success. Financial experts often suggest you will need 8-11 times your income in retirement assets to maintain your standard of living in retirement. Given the past years economic conditions, contributions to your retirement of ten percent of pay may need to be upped to 15 percent to meet your own targets.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Anchor Investment Management Ltd. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisors prior to any investment decision.