Key Takeaways

  • Four major categories of retirement risk are longevity risk, health care and long-term care risk, market and sequence-of-return risk and spending shocks.
  • Longevity risk, or the risk of outliving your savings, can be mitigated — or even eliminated — with guaranteed lifetime income sources like Social Security, a pension and/or annuities.
  • Spending shocks are large, often unexpected, expenses that wreak havoc on finances. Causes include economic factors like inflation and life events like the loss of a spouse.

Retirement Risks Overview

For many people, retirement is the time to enjoy the fruits of their savings and the freedom from daily work obligations. However, it can also be full of uncertainty, and retirees often have a limited ability to pivot when surprise crises hit. Even one of the most wished-for aspects of retirement — a long life — presents the risk of outliving your savings.

The riskiest time of a person’s life is often their retirement years because there are multiple life challenges and fewer opportunities to increase income and savings. The term “retirement risks” refers to events that can cause financial losses and reduced living standards for older adults. 

Retirement risks ‌fall into 4 categories: 

  1. Longevity risk, or the risk of outliving your savings
  2. Health care, both physical and mental, and long-term care risk
  3. Market and sequence-of-return risk or starting asset withdrawals in down markets
  4. Spending shocks, such as unexpected major home repairs and family care responsibilities

Most retirees will live through multiple recessions and market corrections throughout the 20 or 30 years of their retirement.  Planning for income sources that provide a balance of guarantees, growth and flexibility will offer the most peace of mind. 

Longevity Risk

A long life is something many of us strive for. Unfortunately, research indicates that both retirement savers and retirees are concerned with the possibility of outliving their assets.

Longevity risk is about tradeoffs between current and future spending. Either spend too little and die with a pot of money that could have made life more comfortable or spend too much and live your final years in poverty, surviving solely on Social Security and public benefits.

Life Expectancy Estimates

While life expectancy is predictable for large groups, it is not for individuals. According to the Social Security Administration Life Expectancy Calculator, a 65-year-old man can expect to live to age 84.3 and a 65-year-old woman to age 86.9. But these are averages. Personal health habits like diet, exercise, smoking and genetics also play a role.

Social Security projections say one out of every three 65-year-olds will live past age 90 and one out of seven will live past 95. If you retire at the age of 64 and live until age 100, you will require income for 36 years. For many people, this is longer than an entire working career. Even if you live just another 20 years, that’s a long time to finance a life.

Lifetime Income Sources

Longevity risk can be mitigated, or even eliminated, with guaranteed lifetime income sources. These provide a retirement “paycheck” and can reduce retirees’ fear of running out of money.

For most retirees, this includes Social Security and, for fortunate retirees, it includes a defined benefit pension. An additional guaranteed income stream can be obtained by using a portion of your savings to buy annuities, which often continue to pay out no matter how long you live. 

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Health Care Risks

Unexpected medical bills and high out-of-pocket health care expenses can put a major dent in retirement savings. A couple retiring at 65 years old in 2023 can expect to pay about $315,000 in health care costs according to Fidelity Investments’ 2023 research. A single person can expect to pay half that.

Physical Health

Few retirees receive health benefits from their former employers. Kaiser Family Foundation research found that just 13% of large employers offered retiree health benefits to Medicare-age retirees in 2022. In addition, more companies are offering Medicare Advantage plans to retiring workers in a move to save money.

Most retirees select and pay for their own health care coverage, such as Original Medicare (Parts A and B) with supplemental coverage or Medicare Advantage. In addition, Medicare does not cover everything. Items not covered include most dental care, eye exams, dentures, hearing aids and long-term care. Even when Medicare does cover an item, there may be a deductible.

Mental Health

Depression is a risk in retirement. Consequently, retirees must attend to their mental health and emotional needs. For example, when planning where to live, consider locations that will bring happiness, perhaps areas close to loved ones. 

Some retirees desire new adventures. Others want to keep working. An American Psychological Association study found that people who worked after retiring were healthier and happier than those who stopped working.

People forced to retire may be at higher risk for depression. This is especially true if they defined themselves by what they did for a living. One way to avoid depression is to find something else fulfilling to do in retirement, like part-time work or volunteering.

Dementia and cognitive decline may also be risks for retirees, limiting their ability to care for themselves and handle their finances. A strong support system and effective communication are vital. There are also legal and financial strategies to help older adults in this situation. Examples include trusts, powers of attorney, money management and bill-paying services, long-term care insurance, and annuities and pensions that pay lifetime monthly benefits.

Long-Term Care

The most significant health care risk not covered by Medicare is long-term care

In 2021, the average annual cost for in-home care was $42,120, assisted living was $57,912, and a semiprivate room in a nursing home was $100,740, according to the Federal Long-Term Care Insurance Program

For many, long-term care insurance is unaffordable. Data from the American Association for Long-Term Care Insurance shows annual premiums for single men and women at age 55 are $950 and $1,500, respectively. By age 65, premiums reach $1,700 and $2,700, respectively, or $3,750 for a couple. 

Alternatives to long-term care insurance include annuities and life insurance, as some products and policies offer long-term care riders.

Medicaid can also cover the cost of professional long-term care, but a patient’s income and assets must fall below the amounts specified in their state’s Medicaid guidelines to be eligible.

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Investment Risks

In addition to unknown life expectancy, part of the uncertainty around how long someone’s money will last is how well their investments will perform. It is possible that financial markets could produce below-average returns for an extended period of time.

Market Risk

Market risk is the risk of incurring losses from market downturns caused by factors such as market fluctuations, political/economic/social conditions, the behavior of other investors and interest rate changes. It can apply to both stocks and bonds. While all investors experience market risk, retirees have less time for their investments to rebound.

Sequence-of-Return Risk

Sequence-of-return risk is the risk of starting retirement during a prolonged market decline. It is dangerous because wealth can be depleted quickly when investments have to be sold to pay living expenses and investment shares are no longer available during a later market recovery. The order and timing of investment returns have a huge impact on how long savings will last.

Spending Shocks

Spending shocks are large, often unexpected, expenses that wreak havoc on finances. According to a Society of Actuaries report, 19% of retirees and 24% of retired widows experience four or more shocks in retirement. Home repairs and dental expenses were the most commonly reported financial shocks. 

The more shocks people face, the more trouble they have dealing with them. People with lower incomes are also more severely impacted. 

Relationship-Related Shocks

These shocks include divorce, legal separation, widowhood and unexpected needs of family members. For example, new retirees may find themselves “sandwiched” by expenses for young adult children and frail older parents, both of which diminish their retirement savings. 

Finance-Related Shocks

Newly widowed or divorced retirees may be in a higher tax bracket as they shift from filing taxes jointly with a spouse to filing as a single taxpayer. Other financial shocks include major home repairs or upgrades, major dental expenses, forced retirement and lost income, high inflation, medical bills, new tax laws, changing housing needs and inability to manage finances due to declining cognitive abilities.

Tips To Reduce Retirement Risks

You can’t avoid every retirement risk, but you can reduce many. Advance planning is the best way to prepare for and endure the unexpected. 

10 Strategies To Reduce Retirement Risks

Keep Working
Working in retirement has multiple benefits: increased income, contact with other people, more structured days and a sense of purpose. Many older adults find their jobs very fulfilling.
Open a Health Savings Account (HSA)
An HSA allows workers with a high-deductible health insurance policy to save pre-tax money to cover qualified medical expenses. HSA account balances roll over from year to year, so money not spent on medical bills is available as a source of income in retirement. 
Purchase Annuities
Annuities are an effective way to generate regular income to insure against the risk of outliving your savings for people without a pension.
Take Care of Your Health
Maintaining good health lowers the risk of becoming sick and incurring high medical bills. This includes eating healthy meals, exercising, getting enough sleep and scheduling regular physical exams.
Maintain Communication
People who stay in close contact with family members or other trusted advisors are more likely to avoid financial scams and receive support if they experience cognitive impairment.
Diversify Your Assets
Diversification reduces financial risk by creating a portfolio that contains assets that respond differently to market volatility. Diversified portfolios “hedge your bets,” so you don’t lose everything if one investment loses value. 
Maximize Retirement Savings
Savings are the key to building wealth. While working, contribute as much as possible to retirement accounts and take advantage of employer matching funds. If you want to save more than the allowable limits on 401(k)s and IRAs, consider purchasing an annuity.
Portfolio Review
A recent article noted that baby boomers have more stock exposure in their portfolios than they should. This increases their investment risk. It is wise to review asset allocation annually and make adjustments as needed, especially when older adults live off savings withdrawals.
Build a Large Cash Reserve
Hold a couple years of living expenses that guaranteed income sources do not cover in cash assets, such as a money market fund or online bank savings account. With these “buffer assets,” you avoid having to sell stocks and bonds in volatile markets.
Long-Term Care (LTC) Planning
About 10,000 Americans turn 65 daily. More than half will need some level of long-term support at some point in their lives. LTC options include: purchasing an LTC insurance policy, insuring yourself with invested assets, purchasing a Medicaid annuity, moving to a continuing care retirement community (CCRC) and relying on the government (Medicaid) or family members.

Ultimately, retirement risk management depends on your lifestyle and goals. Plans that make sense for one person may not work for another. Be aware of the risks, weigh the costs and benefits of different solutions and make informed choices, with help from financial advisors as needed.

Editor Bianca Dagostino contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 29, 2024
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