Retirement: a time for relaxation, travel, and pursuing long-held passions.
While retirement often paints a picture of carefree days, it usually requires substantial planning and forethought to make that dream a reality.
A big piece of that planning process is thinking through risks that might jeopardize your finances in your golden years. And while it may not be fun to think about, ignoring those potential risks can lead to financial hardship, stress, and a drastic change in lifestyle expectations down the road. By anticipating these challenges, you can develop strategies to mitigate their impact and create a more secure and enjoyable retirement experience.
With that in mind, we’ve rounded up seven common retirement risks (and how you can help address them now for peace of mind).
Quick note: It’s impossible to completely eliminate any/all of these risks in retirement. But being aware of them can help you be better prepared for them.
7 Common Risks in Retirement
1. Longevity risk
Longevity risk is the possibility that you outlive your money – in other words, you live longer than expected and deplete your retirement savings before you die. According to a recent study by the Center for Disease Control and Prevention, life expectancy is increasing once again (after a small dip during the COVID-19 pandemic).
Living longer is a good thing – but you also want to ensure you have the funds to live the two-comma life you want in those “bonus” years. As medical treatments continue to advance, it’s possible that we will continue to extend our lives and run into longevity risk more often.
How to Address Longevity Risk
To help prevent financial problems due to longevity, it’s best to overestimate your lifespan – you’d rather have extra money in your account when you pass away than not enough! In the event that you don’t need those funds, you’ll have more left to give your heirs.
You can also use an online calculator to predict your life expectancy based on data and your specific circumstances, like this one from the Social Security Administration.
2. Healthcare costs
Healthcare costs can be a significant expense in retirement, especially if you experience a major illness or require long-term care (which most people do). It’s estimated that 70% of retirees will need some sort of long-term care in their lifetime.
CNBC also reports what you likely already knew – that healthcare costs are no small expense for senior citizens. They estimate that the average 65-year-old retired couple “can expect to spend around $315,000 on health care expenses in retirement.”
How to Address Increasing Healthcare Costs
To reduce your healthcare costs, it’s important to invest in preventative care and embrace a healthy lifestyle. You can also explore your health insurance options, such as Medicare, and start factoring those potential premium costs into your retirement plan.
Related: What’s the Difference Between Medicare Parts A, B, C and D?
3. Sequence of returns
Sequence of returns risk refers to the possibility of experiencing negative investment returns in the final years leading up to and during your retirement, which can significantly impact your overall plan.
How to Address Sequence of Returns Risk
To help decrease the presence of sequence of returns risk in your life, it’s important to have a diversified portfolio, which involves having a variety of investment types across several industries. The idea is that if one particular market is in a downturn, those losses will be balanced out across your portfolio.
Additionally, you can periodically check in with your advisor to evaluate and adjust your portfolio allocation. These meetings help to maintain your desired risk tolerance and ensure it aligns with your changing retirement timeline and/or goals.
4. The 4% rule
The “4% rule” is a popular method that suggests you can safely withdraw 4% of your retirement savings each year – adjusting for inflation – without running out of money in retirement. While it can be a good rule of thumb, it has been criticized for being overly simplistic and not taking into account individual circumstances.
The reality is that no one can predict the markets or inflation rates, and relying on this “rule” could actually lead to running out of money in retirement.
How to Address the 4% Rule
As you think through how much money you’ll need in your senior years, it’s a good idea to meet with a professional financial advisor who can create a personalized retirement plan considering your unique financial situation, risk tolerance, and desired lifestyle in retirement.
Also keep in mind that retirement can last several decades, and your spending habits may evolve during that time.
5. Inflation
Inflation erodes the purchasing power of your money over time. This means that your retirement savings will need to grow at a rate that keeps pace with inflation in order to maintain your desired standard of living in retirement.
Inflation sits around 3% in 2024, coming down off of previous years of growth, but keep in mind that no one can predict inflation with exact certainty.
How to Address Inflation Risk
Put your money where it has a better chance of working for you (and outpacing inflation in the process). A typical savings account has an interest rate well below 1%, but CDs, investments, retirement savings accounts and other higher interest vehicles can typically outpace inflation (although it’s not always true!).
6. Loneliness
Once you hang up your working hat and lose that regular schedule, the sudden freedom can often feel isolating. In fact, about half of those over the age of 60 are at risk of social isolation – negatively impacting their overall well-being in retirement.
How to Address the Risk of Loneliness
To avoid social isolation and loneliness, it’s important to maintain close relationships with family and friends, plan regular social activities, and explore joining clubs or volunteer groups to foster social interaction and combat feelings of isolation. As you make a financial plan for your retirement, be sure to include enough savings for you to do the things you enjoy!
7. Debt
Although it’s not talked about often, carrying debt into retirement can put a strain on your finances. And unfortunately, it’s more common than you think:
U.S. News reports that “Among retirees, 71% have debt not related to their mortgage with an average balance of $19,888.” That debt can eat away at your retirement funds and keep you from living the retirement lifestyle you want.
How to Address Debt Risk
As you plan for your golden years, consider how you can reduce or eliminate any debts before you retire. You can also work with your financial advisor to explore any debt consolidation opportunities available that could lower your overall payments.
Thinking about what could jeopardize your retirement isn’t as fun as imagining beachy vacations or tossing out the alarm clock, but it is an important step in helping protect your future. With these seven common risks in mind, you can feel more confident in your retirement plan.
Protect Your Future with a Custom Retirement Plan
Have concerns about your retirement income? Want to speak with a professional financial advisor? We’ve got you covered – click here to schedule a consultation with a member of our team and get started today.
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