{"id":5079,"date":"2014-12-10T05:20:00","date_gmt":"2014-12-10T13:20:00","guid":{"rendered":"http:\/\/blog.paladinregistry.com\/?p=5079"},"modified":"2016-01-15T14:45:13","modified_gmt":"2016-01-15T22:45:13","slug":"retirement-became-risky","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/retirement\/retirement-became-risky\/","title":{"rendered":"How Retirement Became So Risky"},"content":{"rendered":"

Risk management is regarded as an essential element of modern investment management.\u00a0 But few people recognize that retirement<\/a>\u2014the period when a person stops working and begins to decumulate their assets–has now become the riskiest stage of a person\u2019s entire financial life.\u00a0 Worse, most retirees are now prepared to shoulder this burden, and most do not even know the risks involved.<\/p>\n

But it wasn\u2019t always this way.<\/strong><\/p>\n

The evolution of retirement policy in the United States reflects a critical combination of attitudes towards workers by their employers.\u00a0 By examining these changing relationships over time, we can see how business has changed from considering its own workers essential partners to the current attitude where workers are regarded more as temporary assets.\u00a0 Of course, these attitudes cannot be clearly articulated, but they are evident during recessions and through the evolution from pension plans to 401(k)s, accompanied by threats to privatize Social Security, reduce health care costs, and failures to promote wage increases.<\/p>\n

Retirees also face the problem of managing portfolios in a low-return, volatile market environment, and then trying to answer the unanswerable question of whether they have enough assets to last them through a longer lifespan than any other American generation.<\/p>\n

In short, retirees today are being asked to manage scenarios which professionals have never consistently done successfully<\/a>.\u00a0 And they are being asked to do it over longer periods of time without adequate resources.<\/p>\n

Retiring With More Security<\/strong><\/p>\n

One of the main reasons for retirees facing increased risk is due to the decline in people being covered by corporate pension plans.\u00a0 The first plan offered in the U.S. was by the Presbyterian Church in 1717 when it established its Fund for Pious Uses<\/a> for retirement ministers.\u00a0 In 1875, the American Express Company began the nation\u2019s first corporate plan.\u00a0 This was followed by pensions offered by the Baltimore and Ohio Railroad in 1884, and by the Pennsylvania Railroad in 1900 for all employees who reached age 70.<\/p>\n

While corporate paternalism played a part, offering pension plans was also good business due to a combination of favorable tax benefits and funding options.\u00a0 From the 1920s to the 1970s, moderate executives at some corporations, such as GE<\/a>, Met Life<\/a>, and Standard Oil of New Jersey<\/a>, promoted pensions as a way to improve labor-management relations and attract better-qualified workers.\u00a0 John D. Rockefeller also favored the expansion of corporate-sponsored pension plans as a means of preventing the expansion of unions.<\/p>\n

In this corporate environment, professionally-managed pension plans, combined with personal savings, and Social Security (post 1935) were the elements of the \u201cthree-legged stool\u201d Franklin D. Roosevelt and other New Dealers referred to when they described retirement security in the United States.<\/p>\n

Flash forward to the popularity of 401(k) s in the 1980s and we can see a definite change in the prospects for retirement security<\/a>.\u00a0\u00a0 Busier, less sophisticated individuals now have the responsibility to select and manage various asset class exposures over a 30-year time period in order to provide the optimum portfolio returns in a volatile market environment.\u00a0 This is all being done in a global economy which changes every trading day and one increasingly dominated by professional traders managing multi-billion portfolios.<\/p>\n

On the institutional side, risk is now a stand-alone discipline and a critical element in every major corporation.\u00a0 Global risk management (GRM) has its origins in Modern Portfolio Theory <\/a>(MPT), which formalized elements of portfolio diversification, asset allocation, market risk and portfolio risk.\u00a0 GRM also incorporates option risk management via valuations.\u00a0 This assigns a numeric risk to almost every possible choice a corporation can make in every aspect of its operations.\u00a0 Risk management is most sophisticated in the investment industry, which now regularly uses tools, such as value at risk to examine credit and market risks.\u00a0 Once the risk is quantified, professionals can employ a number of hedging alternatives.<\/p>\n

Of course, none of this is readily available to individual investors who don\u2019t have the tools or ability to hedge their 401(k) s during recessions or market declines.\u00a0\u00a0 This means average investors have only a few choices when it comes to risk management<\/a>:\u00a0 They can accept it, manage it, or transfer it.<\/p>\n

My bet is that most choose to accept it mainly because they never see it coming. And this is exactly why retirees who have stopped working and are living off of a fixed accumulation of liquid assets are now facing more financial risk than at any other time in their lives.<\/p>\n","protected":false},"excerpt":{"rendered":"

Risk management is regarded as an essential element of modern investment management.\u00a0 But few people recognize that retirement\u2014the period when a person stops working and begins to decumulate their assets–has now become the riskiest stage of a person\u2019s entire financial life.\u00a0 Worse, most retirees are now prepared to shoulder this burden, and most do not even know the risks involved. But it wasn\u2019t always this way. The evolution of retirement<\/p>\n","protected":false},"author":16,"featured_media":5093,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[117],"tags":[],"class_list":["post-5079","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-retirement"],"yoast_head":"\nHow Retirement Became So Risky<\/title>\n<meta name=\"description\" content=\"Few people recognize that retirement, the period when a person stops working and begins to decumulate assets, has now become the riskiest stage of life.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.paladinregistry.com\/blog\/retirement\/retirement-became-risky\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" 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