The Six Retirement Risks

Whether you are four decades, four years, or four weeks from retirement, it is beneficial to understand the major risks that can derail a hopeful retiree.  Part of laying out a comprehensive retirement plan involves structuring your savings, income, and future legacy in a way that will remain robust through changing market conditions and lifestyle needs.  Read on to learn more about each of the six key retirement risks. 

Withdrawal Rate

The transition at retirement from the accumulation phase of life (building your savings) into the distribution phase (spending your savings) can be difficult to navigate without proper planning. Unlike many retirees decades ago who could depend on consistent pension income, the majority of retirement income today is generated through withdrawals from investment portfolios like 401(k)s, 403(b)s, IRAs, or taxable brokerage accounts.  Pensions are now a rarity and social security makes up only a fraction of the income retirees receive.  

The importance of creating a withdrawal plan that produces adequate after-tax income and will last for the entirety of retirement cannot be understated.  Many factors need to be considered, including the pace of spending, inflation and cost increases, portfolio volatility, proportion of guaranteed income, and types of expenses and debt.  No one situation will necessarily be the same as another.  

You (hopefully!) only plan to retire once, so you must prepare to get it right the first time.  

Asset Allocation

Asset allocation is the process of dividing your investment portfolio between different asset classes, most commonly stocks, bonds, and cash, to manage investment risk within your portfolio.  Many retirees, due to concern about market volatility and income withdrawals, struggle to find the right balance of growth and protection as they transition from building their savings to spending their savings.  

As investors approach retirement, reducing their asset allocation from an aggressive (stock-heavy) portfolio to one that is more evenly balanced with bonds and cash can be hard.  Managing the ongoing transition towards a conservative investment strategy takes thoughtful planning and careful rebalancing throughout retirement as the market ebbs and flows and the portfolio shrinks through planned distributions.  

Longevity

Many soon-to-be retirees are focused on how soon they can take the plunge, but there is another factor that is as important, if not more important: Length of retirement.  The average length of retirement and the number of high-activity years in retirement have grown over the past few decades as life expectancy improved. This fact requires proper planning and income projections so that late in life, retirement funds are not depleted.  

Considerations such as large expenses, gifting and legacy planning, guaranteed income, and long-term care planning are all relevant to how the latter years of retirement will be mapped out.  Managing these goals and continuing to monitor and adjust as circumstances change is an essential part of an ongoing financial planning process.  

Medical Costs

Despite many legal changes to reduce the cost of care for retirees on Medicare, the cost of healthcare continues to rise.  The New York Times reports that the average cost of health and medical care for a single person over a 20-year retirement will be $157,500 (2023). Women, because they tend to live longer, can expect to require more money for their medical costs than men.  

When planning for retirement, it is important to consider your current health, available healthcare plans, family history, and longevity.  These factors will impact how much you may need to set aside for your medical costs. While difficult to predict, long-term care costs will also need to be factored into your planning in the state you plan to live.    

Inflation

Rising costs can be one of the most deceptive risks all investors, but especially retirees, will face.  Rising costs for normal living expenses or planned events like travel can cut into the retirement lifestyle that was originally planned.  

For many retirees, investing more conservatively and holding a higher percentage of cash is the natural strategy to minimize the risk of loss from investing.  However, a portfolio that is overweight in cash or other conservative investments can lead to diminishing purchasing power through inflation.  The period from 2021 to 2023 saw the highest inflation rate in decades.  Despite receiving cost-of-living adjustments from Social Security, most retirees saw their standard of living fall through a mixture of higher costs and depressed investment returns in conservative investments such as fixed-income funds.  

Participation in growth-oriented investment strategies such as stocks or income planning that incorporates cost of living increases will benefit retirees who experience high inflation in their retirement years.  

Taxes

Taxes and tax management can be difficult to predict in our constantly changing legislative environment.  Although infrequent, our federal tax laws change often enough that most retirees will live through one or more changes to the way their income is taxed or their retirement accounts are handled during or after their lifetimes.  It is impossible to predict what income tax rates will be in the future which can make certain choices difficult (such as retirement saving pre-tax or post-tax).  

Tax management is an important part of a strong income plan.  Balancing your taxable income with sources that are taxed at lower rates (capital gains or qualified dividends) or are tax-free (Roth IRA distributions) can be the difference between one marginal tax bracket and another.  With proper tax planning ahead of time, most retirees can avoid a situation where they are forced to take more income than they need as minimum required distribution (MRD).