Tuesday, October 19, 2021

Climate Change Can Vandalize Your Retirement Plans- It’s Alarming

The detrimental effects of climate change are not only limited to physical infrastructure but financial too. Especially, your retirement plan.

Highlights

  • UN report on climate change declares “Code Red” for humanity.
  • Climate change to impact pension fund assets invested through 401(k) plans.
  • Extreme weather puts popular retirement spots such as those in Atlantic, Pacific and Gulf coasts at risk.
  • Significantly increased costs for home insurance against floods and fire in many states

The UN’s Intergovernmental Panel on Climate Change (IPCC) has declared “Code Red” for humanity in its recent landmark report. The study reveals that human activities have caused unprecedented and irreversible harm to Earth and that, planet’s atmosphere will be 2.1 to 3.9°C warmer by 2100.

Alarmingly frequent and devastating wildfires, extreme flooding, the worst heat waves ever, and unseasonal snow are not only raising concern about the physical infrastructure but also the financial.

According to the WHO, climate change is expected to cause 250,000 additional deaths per year between 2030 and 2050. On the other hand, the U.S. Environmental Protection Agency (EPA) predicted that extreme heat has enhanced the risk of illness among older adults, especially those with chronic illnesses.

All of this leads to an escalation in the insurance costs for retirees as insurers seek to keep pace with climate and weather-related property damage.

So what do you do to secure your retirement plans in the face of this growing threat?

Here are solutions that will help you to plan how to create a secure retirement plan to address the threat of extreme weather and climate change. But first, let’s understand the matter in depth.

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How Climate Change Threatens 401(k) Plans?

According to a recent report of the Government Accountability Office to the U.S. Congress, experts foresee a threat to pensions and 401(k) plans just as the rest of the global economy is vulnerable to climate risks. The agency warned of an increase in corporate and broader economic losses because of costs arising out of extreme weather events like droughts, wildfires, flooding.

The physical risks to individuals, especially the more vulnerable elderly and senior citizens, pose a threat of higher costs post-retirement. This is already apparent from the human losses caused by extreme events like wildfires and floods. This threat or risk can have a material effect on the pension fund assets.

Physical threats can be chronic as well as acute and include effects on the health of the elderly because of changing weather patterns, rise in sea levels, extreme temperature, and changes in water availability and/or other natural resources.

According to experts, the estimated value loss for a future with a 6°C of warming and resultant physical risks is at $43 trillion.

In comparison, the total current market capitalization of all the stock markets of the world is only $70 trillion. And since physical illness can get pronounced and acute with age, and with treatment costs including health insurance rising, these can severely dent your retirement funds. 

Further, climate change and extreme weather also have a direct impact on pension fund assets in which you might have invested to reap benefits after retirement as is the option available in 401(k) plans.

Such risks include those that are driven by reduced demand for fossil fuel products with the global community shifting to fulfill the international community’s pledge to limit global warming to 2°C. That would make fossil fuel assets supply-constrained, scarce commodities permanently and therefore turn out to be a bad asset investment upon retirement.

Germany’s Deutsche Bank recently pointed out that when more oil is left in the ground, it would mean writing off a large chunk of the current net asset value that it comes with if taken out of the ground. Pension plans and funds that are invested in carbon assets are therefore at risk of rapid value depreciation. This was recently aptly evaluated by Citibank as it stated that about 100 trillion of assets could be ‘carbon stranded’ in the near future – and some are already economically so.

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Climate Change and Threat to the Most Popular Retirement Destinations in the U.S.

For decades, individuals who are soon to retire, have had made plans for settling in the warm beach spots on the Atlantic, Pacific, and Gulf coasts as well as in the desert southwest. However, currently, many of these sought-out locations directly face the threats from some of the worst climate change impacts. Most of the spots are experiencing them already while experts predict the worst is yet to come- unless we are able to reverse climate change.

It is anticipated that extreme weather events such as hurricanes, droughts, heatwaves, and floods will become more common with continued global warming that dis-balances natural systems.

“Current climate and future climate is absolutely something that people should be thinking about when deciding where to live, where to retire,” say climate scientists at Columbia University’s Earth Institute.

Some of the worst impacts of climate change could be in store in the future for popular retirement destinations such as Florida and Arizona. For example, longer and more frequent periods of record heat are already being experienced in Arizona and scientists expect this trend to continue with escalating global warming.

Additionally, hurricanes have been on the rise in Florida causing serious damage to people and property. The rising sea levels that surround the peninsula also potentially threaten the more than 21 million people residing there. 

Hence, scientists warn that these are “absolutely critical concerns” to think about when planning your retirement and setting up your retirement funds. 

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Climate Change and Threat to Home Value and Home Insurance

Older homeowners may be especially vulnerable in coming years, to the extent that they might eventually be forced to forego flood insurance or fire insurance for their homes. This is due to the impact of extreme weather events caused by climate change resulting in an increase in premiums.

For example, over the past couple of years, more incidents of wildfire have caused destruction across California and Southern Australia. That has made it more expensive and potentially harder for homeowners to get insurance. The impact can be more acute for retirees as they already have constrained resources. This is also becoming apparent, according to industry experts and watchers, in parts of Florida, Louisiana, Mississippi, and Texas where hurricanes and other natural calamities have caused more havoc in recent years than ever in the past. 

It is likely that elderly house owners would get a non-renewal notice from their insurance company. This leaves the only option of replacement coverage at much higher prices.

The Solution- Climate-Smart Retirement Plans

Less than 3 percent of 401(k) plans currently offer an environment, social, and governance (ESG) fund as an investment option for employees. And only about 1 percent of all 401(k) assets are held in these socially responsible funds.

This is partly because most people invest their 401(k) into target-date funds which are all-in-one funds that move from stocks to bonds as investors approach retirement age. That leaves little space for investing in other types of assets such as ESG assets. 

You can get to know more about how and how much you should invest in your pension or 401(k) plan in ESG funds from experts.

It could be possible to divert a substantial portion of your funds as investments in assets that are climate change neutral. This will help your retirement funds to cope up with the impact of climate change. 

Conclusion

All said and done, one of the unfortunate truths is that money still makes the world go ‘round’ and it would potentially be the same when you retire. That’s why it has been suggested that you should prepare to “speak with your wallet” in order to reduce the threat of climate change on your retirement funds. The most basic and potent solution at hand is to decide where and how you invest your money at present to secure your retirement from the threats of climate change.

Debdutta Ghosh
Debdutta Ghosh is a Journalist who has been associated with leading media firms of India like Asian Age, Indian Express and Hindustan Times as well as television channels such as Zee News/Business and ABP News as a reporter for more than 20 years. With a Post-Graduation Diploma in Mass Communication & a Bachelor Degree in Science, his expertise as content expert lies in the areas of Business News Analysis, PR, and Marketing Communication.

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