Reaching retirement is an incredible achievement, but it’s important to think of that next stage as a long‑term plan, not a finish line. Retirement can, and hopefully will, last a long time—possibly 30 years or more.
Successful retirement planning is about managing uncertainty, not predicting outcomes, and the best way to do that is through a comprehensive financial plan. In this article, we will discuss several key risks retirees face and strategies that can help mitigate them.
The Core Risks That Affect Long-Term Retirement Outcomes
Longevity Risk
One of the biggest concerns in retirement is running out of money, and for many retirees, this fear outweighs concerns about market losses. A common cause is underestimating how long retirement may last. The best way to address longevity risk is through proper planning and by assuming a longer‑than‑average life expectancy. In our financial plans, we typically assume a life expectancy of 95.
Inflation Risk
Inflation affects the cost of goods and services, and over time it quietly erodes purchasing power; essentially, a dollar today will not buy the same thing tomorrow. Inflation shows up in everyday expenses such as food, housing, transportation, and utilities.
It’s important that retirement investments take inflation into account. Having only fixed‑income investments may feel safe, but if they barely keep pace with inflation, the strategy may not be sustainable over the long term. Balancing fixed income with more growth‑oriented investments is often necessary to maintain purchasing power.
Healthcare & Long-Term Care Costs
Healthcare expenses can have a significant impact on retirement. Medicare has important limitations; most notably, long‑term care (such as extended nursing care or home care) is generally not covered. Additionally, without supplemental coverage, retirees may face meaningful out‑of‑pocket costs.
Long‑term care insurance can be a useful tool, as these expenses can become very costly. Typically, we recommend clients begin evaluating long‑term care insurance between ages 50 and 60. It’s also important to account for rising healthcare costs in a financial plan. While many plans assume an inflation rate of 2.5%–3.0% for most expenses, it is often more prudent to assume a 5% inflation rate for healthcare‑related costs.
Market Volatility
Market volatility is an unavoidable part of investing and often causes concern in retirement. It’s important to understand the difference between short‑term volatility and long‑term market risk. Short‑term volatility refers to day‑to‑day or year‑to‑year fluctuations, including corrections and temporary downturns. Long‑term market risk refers to prolonged periods of poor market performance, especially during the early years of retirement, when withdrawals are occurring.
Making emotional decisions during periods of volatility can be harmful; it is much more effective to stay invested with a long‑term focus. One strategy that can help is maintaining a cash reserve of one year’s worth of expenses. This can provide an emergency cushion to avoid selling investments during market downturns. The exact amount of cash you save should balance financial practicality with peace of mind; the goal is to have enough liquidity without constantly worrying about access to funds.
Sequence-of-Returns Risk: Why Timing Matters More Than Average Returns
Sequence‑of‑returns risk is one of the least understood risks in retirement. It refers to the impact that poor portfolio performance early in retirement, combined with withdrawals, can have on long‑term outcomes.
For example, consider two people who each start retirement with $1,000,000, withdraw $50,000 per year, and earn the same average return over 10 years. The only difference is that one experiences negative returns in the first three years, while the other experiences positive returns early on. The retiree facing early losses may never fully recover, resulting in a significantly different outcome despite identical average returns.
The key takeaway is that average returns alone do not tell the full story: timing matters. Sequence‑of‑returns risk is often overlooked because retirement discussions tend to focus on long‑term averages rather than short‑term outcomes. This risk is amplified when emotionally driven investment decisions are made during market downturns early in retirement.
While sequence‑of‑returns risk cannot be fully eliminated, it can be mitigated through financial planning. Strategies include maintaining a cash reserve for expenses, using flexible withdrawal strategies during down markets, and diversifying sources of income and investments.
Building Protection into a Retirement Plan
Diversification
One of the most effective ways to build protection into a retirement plan is through asset diversification, maintaining a mix of U.S. equities, international equities, fixed income, and alternatives. Diversification allows retirees to draw from different asset classes during market downturns, helping to smooth returns over time.
For example, bonds have historically tended to have lower correlation with equities, allowing retirees to sell bonds rather than stocks when equity markets are down. Maintaining a cash reserve covering six months to one year of expenses can also reduce the need to sell investments during unfavorable markets. When appropriate, alternative investments may further help diversification, as they are often designed to perform differently than traditional stock markets.
Income Source Diversification
Another important form of diversification is income source diversification. At a high level, retirement assets are typically held in taxable and tax‑deferred accounts. Taxable accounts include individual and joint brokerage accounts, while tax‑deferred accounts include 401(k)s and IRAs. Tax‑deferred accounts grow without taxation, but withdrawals are taxed as ordinary income. Taxable accounts do not grow tax‑free, but when withdrawals occur they are generally not taxed.
Having multiple account types from which to draw can be beneficial, allowing retirees to manage tax exposure more effectively. In addition, other income sources such as annuities can provide guaranteed income, and may be applicable for some retirees. (For more information, please reference the article “Income Strategies in Retirement.”)
Withdrawal Strategies
Managing withdrawals is another critical part of building a retirement plan. When creating a financial plan, we not only project outcomes based on current spending but also test scenarios in which spending increases or decreases, such as by $10,000 per year. These guardrails help provide peace of mind if circumstances change.
Spending flexibility is also important. If markets are significantly down, it may be prudent to postpone large discretionary expenses, such as a major trip, so that investments do not have to be sold at depressed values.
Estate & Legacy Planning
Protection in retirement planning is not limited to assets and income; estate and legacy planning are equally important. Keeping estate documents and beneficiary designations up to date is essential, as family goals and intentions can change over time. It is also critical to plan for incapacity, not just death.
Legacy planning may also include goals such as supporting education expenses or helping family members during your lifetime. Some prefer to leave inheritances, while others choose to share their wealth while they are alive, such as helping with a home down payment or funding a family trip.
Planning and Managing Risk is an Ongoing Process
A financial plan is not a one‑time event; it is an ongoing process. Many factors change throughout retirement, including health, family circumstances, tax laws, and market conditions. Periodic reviews with an advisor help ensure the plan remains aligned with goals and adapts to life changes.
While risk cannot be eliminated, it can be managed through thoughtful planning and the strategies outlined above.
Start a conversation with our team today to build a retirement plan designed to manage long‑term risk, protect your income, and adapt as life evolves.
Disclosure: Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.