Top retirement risks and how to prepare for them

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC, Head of Financial Planning | Citizens Wealth Management

_{As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.}

With more time to spend time with loved ones, travel, and focus on hobbies, retirement offers an exciting new chapter of life. However, it also comes with financial risks that must be addressed.

From outliving savings to market volatility to rising health care costs, every retiree faces risks that could impact their financial security. It's important to understand how these risks could affect you so you can create a plan to keep your retirement on track.

Get started with this guide to some of the top retirement risks and tips on how to help manage them.

Longevity risk: the risk of outliving your savings

Longevity risk — the possibility of outliving your savings — is one of the biggest retirement risks.

Many people underestimate how long they might live. Although the average life expectancy at birth is around 77 years in the U.S., the life expectancy for a 65-year-old male or female is pushed out into their 80s. For married couples, the likelihood that at least one spouse lives into their 90s is significant.¹

Living longer means that you need your savings to last longer, but it also means extended exposure to other potential risks. The longer your retirement, the more time there is to be impacted by other retirement risks, like health care costs, inflation and market fluctuations.

Planning for longevity requires a diversified retirement income strategy, including Social Security planning, and a thorough analysis of qualified retirement accounts like pensions, IRAs and 401(k)s. The goal should be to create a plan to help you maximize income, protect your portfolio and minimize your tax burden.

Withdrawal rate risk: ensuring your savings last

Once you've retired and are no longer receiving a regular paycheck, it's crucial to develop a plan for withdrawing money from your savings so you don't deplete it too quickly.

A common withdrawal rate rule of thumb is the 4% rule. This rule suggests that you can safely withdraw 4% of your savings in year one of retirement and then adjust it for inflation each year for the next 30 years.

However, this rule may not work for everyone. Market performance, inflation, your life expectancy, and the order in which you make withdrawals from different retirement accounts can all impact your results.

With something as big as retirement, it's important that your withdrawal rate is based on your specific circumstances and goals.

Market risk: managing volatility in retirement

Market risk is the impact of market downturns on your investments. Unlike younger investors who have decades to recover from market fluctuations, retirees face a shorter time horizon.

A significant downturn can quickly chip away at your retirement savings — especially if you need to make withdrawals during market slumps.

To help buffer savings against market volatility, it's important to adjust your investment mix as you head toward retirement. Whereas your early savings years might include an equity-heavy portfolio — one more prone to the market's ups and downs — a retirement-ready portfolio likely focuses more on fixed-income investments.

Sequence of returns risk: the timing of returns matters

The timing of market returns could significantly affect your retirement portfolio. If a market downturn negatively impacts your portfolio late in your working years or early in your retirement, you could deplete your savings faster than expected.

As a hypothetical example, imagine two retirees: Investor A and Investor B. Both start retirement with the same $1 million portfolio, withdraw the same amount each year for income, and even experience the same average annual return throughout retirement. Yet, Investor B's portfolio runs out of money years before Investor A. How is that possible?

The key lies in the sequence of returns. Investor A experiences strong market gains early on, allowing the portfolio to grow before facing losses in later years. Investor B has losses right at the start of retirement, reducing the portfolio's value early and making it harder to recover.

Even though their average annual returns over retirement are the same, the order of returns affects how long their portfolio lasts. This is why having a financial plan that addresses sequence of returns risk is so crucial for retirees.

Inflation risk: the silent erosion of purchasing power

Inflation affects the cost of everything and can erode your purchasing power over time. Even at a moderate historical average of around 3% per year, costs for necessities — such as food, utilities and health care — can rise significantly over a 20- to 30-year retirement.

To combat inflation risk, it's important to consider maintaining some level of exposure to growth investments. Dividend stocks and low-volatility equity funds could generate higher returns than fixed income investments and help protect your purchasing power.

Health care and long-term care risk: planning for rising medical expenses

Health care is one of the biggest expenses in retirement. It is often significantly underestimated too.² According to data from the Employee Benefits Research Institute, couples relying on Medicare have a 90% chance of meeting their health care spending needs if they have between $189,000 saved (and use Medicare Advantage) and $351,000 (and use Medigap).³

Financial professionals, skilled in Medicare planning and long-term care insurance, can help balance costs and coverage in retirement. You can also build a strategy to save today using a health savings account (HSA) to help cover future medical expenses tax-free.

How to help manage retirement risks

A well-structured retirement plan tailored to your financial situation is essential for managing retirement risks. Here are some key strategies:

• Create a diversified income plan: Balance withdrawals from different sources such as Social Security, pensions, annuities and investment accounts.
• Diversify your investments: Diversifying investments with the right mix of stocks, bonds and other assets can help manage market and inflation risks.
• Regularly review your portfolio: Adjust allocations as needed to align with risk tolerance and market conditions.
• Develop a structured withdrawal strategy: Ensure your savings last by planning withdrawals wisely.
• Protect against health care costs: Consider insurance options like long-term care coverage and supplementing Medicare.

A Citizens Wealth Advisor* can help

Navigating retirement risks can be complex, but you don't have to do it alone. If you're looking for professional guidance, consider speaking with a Citizens Wealth Advisor to create a personalized retirement plan. The right plan today can provide financial confidence for decades to come so you can enjoy your retirement to the fullest.

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