Retirement risks include unpredictable events or circumstances that can severely impact your financial plans for retirement. These risks can prevent you from saving enough to fund your golden years and can reduce the value of your savings once you do retire. It’s important to learn how to mitigate these retirement risks.
- Written by Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.Read More
- Financially Reviewed ByEbony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.Read More
- Published: May 31, 2022
- Updated: August 12, 2023
- 7 min read time
- This page features 22 Cited Research Articles
- Edited By
What Are the Biggest Risks People Face in Retirement?
There are several major financial risks you’ll face once you retire. Many of the risks involve the unpredictable nature of the future.
- Interest rates
- Longevity — outliving your money
- Rising health care costs
- Public policy changes
You can take certain steps during your retirement and in the years before you retire — while you are still in the planning phase — to better prepare for and mitigate these risks.
The value of money always decreases over time, so money in your savings account won’t be as valuable in 20 years as it is today.
Medical costs also tend to outpace inflation. While Social Security benefits increase with inflation, other sources of retirement income may not.
It’s important to consider the degree to which inflation will affect your retirement savings account over the course of your retirement years.
For example, let’s consider that you retired in January 2000 with an annual retirement income of $50,000. By April 2022, you’d need an annual retirement income of $85,637 just to have the same buying power as you had when you first retired, according to an inflation calculator from the U.S. Bureau of Labor Statistics.
You should make hedging against inflation a critical part of your retirement planning calculations.
According to the U.S. Department of Labor in a 2020 retirement planning booklet, “If your money is not earning more than the rate of inflation, you will lose part of your nest egg’s buying power.”
When interest rates rise or fall, the changes can affect the return you earn on your IRA, 401(k) or other retirement account investments. Changes in interest rates will affect various types of investments in different ways.
Higher interest rates can drive down the value of many stocks while driving up the rate of return on bonds and other fixed income instruments such as certificates of deposit (CDs). Likewise, lower interest rates can drive up the value of stocks while making bonds a less-attractive investment.
Interest rates are closely related to inflation. When inflation rises, the Federal Reserve raises interest rates to slow down inflation. When inflation slows — such as during a recession — the Fed may lower interest rates to stimulate the economy.
Longevity Risk: Running Out of Money
People are living longer, which means they are also spending more time in retirement.
Your income in retirement can only stretch so far. The longer you live, the more likely it is that you will run out of your savings. This is called your longevity risk.
Knowing when to retire is important. Deciding when you are going to leave the workforce and start collecting your Social Security benefits can have a major impact on your monthly budget in retirement.
Debt can affect both your ability to save for retirement and your ability to live comfortably once you do retire.
Roughly 40% of working Americans say that debt is negatively impacting their ability to save for retirement, and nearly a third of retirees say that debt is a problem for their household, according to the 2022 Retirement Confidence Survey from the Employee Benefit Research Institute and Greenwald Research.
In most cases, your retirement income will be less than what you earned while working. Paying down — or paying off — your debt before retirement can make a huge difference in your financial situation. Getting rid of your debt it the years before you plan to retire can free up money that you can then put toward your retirement savings.
Rising Health Care Costs
Unexpected medical bills and high out-of-pocket costs are a real threat to retirees and their bank accounts.
For example, a healthy couple who retired in 2022 at age 65 will pay an estimated $315,000 in out-of-pocket health care costs over the course of their retirement, according to a study by Fidelity Investments.
Depending on the type of Medicare coverage you have, 76% to 82% of your health care costs in retirement will be for Medicare monthly premiums alone, according to a report from T. Rowe Price.
It’s important to know that Medicare doesn’t cover everything. The T. Rowe Price study considered premiums, deductibles, coinsurance and copayments for Original Medicare — Medicare Part A and Medicare Part B — in addition to Medicare Advantage plans, Medicare Part D and Medigap supplemental insurance as well as out-of-pocket costs for dental, hearing and vision coverage.
Also remember that Medicare does not cover long-term care. You may want to consider long-term care insurance to help cover that cost.
Losing or quitting your job can derail your retirement savings plans.
About 60 million Americans contributed to a 401(k) plan in 2020, according to the Investment Company Institute. And 68% of American workers had access to an employer-sponsored retirement plan in 2021, according to the U.S. Bureau of Labor Statistics.
If you depend on your employer plan to handle your retirement savings, you need to make immediate plans to continue contributing toward your retirement if your job suddenly goes away. Even a short gap in contributions can have a snowball effect on your savings by the time you are ready to retire.
Consider opening or rolling over your 401(k) into an IRA to keep contributing toward your future. Just remember that you won’t be getting an employer match.
Public Policy Risk
Changes to Social Security, Medicare benefits, Medicare premiums, Veterans Affairs benefits and taxes can greatly impact your quality of life in retirement.
Unfortunately, the threat of benefit reductions is nearly impossible to plan for.
While Social Security provides annual cost-of-living-adjustments (COLAs), Medicare does not. Your health care costs may continue to rise — and often unpredictably. For instance, Medicare Part B premiums increased by $21.60 a month in 2022 — from $148.50 per month in 2021 to $170.10 per month in 2022.
That increase was the largest jump in Medicare’s history. The cost of monthly Medicare Part B premiums has risen by more than 200% over a 20-year period, according to data from the Kaiser Family Foundation.
The Society of Actuaries survey notes, “Since most current and future retirees will depend on these benefits to secure their retirement, the risk of changes in these programs is major, as the changes may adversely affect retirement security.”
Help Dealing with Retirement Risks
Consulting a licensed financial advisor can help you understand which retirement risks you should be most aware of and the best ways to avoid or at least minimize the risks.
Financial professionals are trained and experienced in dealing with retirement risks. Hiring an advisor can make the chore of preparing for the worst a lot easier.
But there are some things you should keep in mind to lessen the impact of financial issues in retirement.
- Consider a part-time job
- Take care of your health
- Maintain relationships with family and friends
- Diversify your portfolio
- Maximize your retirement savings
- Consider long-term care insurance
To estimate how much money you’ll spend in retirement, consider using the 4 percent rule or the 3 percent spending rule.
With the 4 percent rule, you would estimate that as a retiree you’ll spend 4 percent of your money in the first year of retirement, then increase that spending amount each year to account for inflation.
The 3 percent spending rule is an easier, more conservative approach.
Your level of spending is lower, but it will adjust with your portfolio value. So, if you are saving less, your level of spending also drops.
22 Cited Research Articles
- Fidelity Investments. (2022, May 25). How to plan for rising health care costs. Retrieved from https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
- O’Brien, S. (2022, April 22). Getting Close to Retirement? Be Sure Your Plan Includes Managing This Risk. Retrieved from https://www.cnbc.com/2022/04/22/getting-close-to-retiring-be-sure-you-are-managing-this-risk.html
- Parrish, S. (2022, April 19). Five Ways to Manage the Longevity Risk in Retirement. Retrieved from https://www.forbes.com/sites/steveparrish/2022/04/19/five-ways-to-manage-the-longevity-risk-in-retirement/?sh=6e22ce8064c4
- Roepe, L.R. (2022, March 5). You Quit Your Job, But You Still Need a Retirement Plan. Retrieved from https://www.nytimes.com/2022/03/05/business/quitting-your-job-retirement-ira.html
- Genworth Financial Inc. (2022, February 7). Cost of Care Trends & Insights. Retrieved from https://www.genworth.com/aging-and-you/finances/cost-of-care/cost-of-care-trends-and-insights.html
- Neuman, T., Cubanski, J. & Freed, M. (2022, January 12). Monthly Part B Premiums and Annual Percentage Increases. Retrieved from https://www.kff.org/medicare/slide/monthly-part-b-premiums-and-annual-percentage-increases/
- EBRI. (2022). 2022 Retirement Confidence Survey. Retrieved from https://www.ebri.org/docs/default-source/rcs/2022-rcs/2022-rcs-summary-report.pdf
- U.S. Bureau of Labor Statistics. (2021, November 1). 68 Percent of Private Industry Workers Had Access to Retirement Plans in 2021. Retrieved from https://www.bls.gov/opub/ted/2021/68-percent-of-private-industry-workers-had-access-to-retirement-plans-in-2021.htm
- Marnin, J. (2021, August 19). Just 60M Americans Participated in 401K Plans Last Year, But Most Funds Saw Boost. Retrieved from https://www.newsweek.com/just-60m-americans-participated-401k-plans-last-year-most-funds-saw-boost-1621201
- Banerjee, S. (2021, March). A New Way to Calculate Retirement Health Care Costs. Retrieved from https://www.troweprice.com/content/dam/fai/Collections/DC%20Resources/a-new-way-to-calculate-retirement-health-care-costs/CalculateRetirementHealthCareCosts.pdf
- U.S. Department of Labor. (2020, November). Taking the Mystery Out of Retirement Planning. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/taking-the-mystery-out-of-retirement-planning.pdf
- Society of Actuaries. (2020, May). 2019 Risks and Process of Retirement Survey. Retrieved from https://www.soa.org/globalassets/assets/files/resources/research-report/2020/2019-risks-process-retirement-survey.pdf
- Society of Actuaries. (2020, May). Products, Tools, and Strategies That Address Retirement Risks — Essay Collection. Retrieved from https://www.soa.org/globalassets/assets/files/resources/research-report/2020/products-tools-strategies-retirement-essays.pdf
- U.S. Department of Health and Human Services. (2020, February 18). How Much Care Will You Need? Retrieved from https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
- Mercado, D. (2019, July 18). Retiring This Year? How Much You’ll Need for Health-care Costs. Retrieved from https://www.cnbc.com/2019/07/18/retiring-this-year-how-much-youll-need-for-health-care-costs.html
- HealthView Services. (2019, July 8). Why Health Needs To Be Part of Retirement Planning: New HealthView Services White Paper. Retrieved from https://www.prnewswire.com/news-releases/why-health-needs-to-be-part-of-retirement-planning-new-healthview-services-white-paper-300880937.html
- Society of Actuaries. (2017). Post-Retirement Risks and Related Decisions. Retrieved from https://www.soa.org/globalassets/assets/files/resources/research-report/2017/post-retirement-risks-decisions.pdf
- Society of Actuaries. (2017). Shocks and the Unexpected: An Important Factor in Retirement. Retrieved from https://www.soa.org/globalassets/assets/files/resources/research-report/2017/shocks-inexpected-factor-retirement.pdf
- Pfau, W. (2014, March 24). Breaking Down Retirement Risks. Retrieved from https://www.marketwatch.com/story/breaking-down-retirement-risks-2014-03-24
- Bank of America. (n.d.). The Top 4 Retirement Concerns — and How to Handle Them. Retrieved from https://bettermoneyhabits.bankofamerica.com/en/retirement/top-retirement-concerns
- Merrill. (n.d.). 4 Big Retirement Risks — and How to Prepare for Them. Retrieved from https://www.ml.com/articles/big-retirement-risks-and-how-to-prepare-for-them.html
- U.S. Bureau of Labor Statistics. (n.d.). CPI Inflation Calculator. Retrieved from https://www.bls.gov/data/inflation_calculator.htm