Retirement is a time of great joy for many people, but it can also be full of uncertainty. Traveling more, spending extended amounts of time with family, and taking up new hobbies are some of the ways in which a post-retirement life may look very different. However, retirees often face significant risks, especially when it comes to their finances.
Older Americans might be aware of some of the risks, though. A Bankrate survey from December 2022 found that just 22 percent of baby boomers think their finances will improve in 2023, compared to 48 percent for Generation Z and millennials. Rising health-care costs, market volatility, and inflation are just some of the risks that add to the financial uncertainty of retirement. These risks and others are among the things people need to keep in mind as they move closer to retirement.
Top financial risks that retirees face
Retirement comes with several financial risks. Here are some of the biggest risks retirees face.
1. Running out of money
Running out of money is a significant risk for many retirees. Not only do retirees have insufficient savings in many cases, but people also live longer today than they did in decades past.
If you are behind on your retirement savings and worried you might run out of money someday, there are a few steps you can take. For instance, you can beef up your retirement savings, contributing the maximum to an IRA and increasing your contributions to a 401(k) or similar account. Those aged 50 and older can make catch-up contributions that allow you to contribute additional amounts beyond the typical limit.
Other steps include delaying Social Security payments and buying an annuity. Delaying Social Security will increase your monthly payments. Annuities, on the other hand, let you buy a policy that will pay you a certain amount for life.
2. Health care costs
Increased medical bills are inevitable for most of us as we age, and that could spell trouble without proper planning. Fidelity estimates the average couple aged 65 in 2022 will need approximately $315,000 to cover health care expenses alone during retirement. The exact cost may vary widely in each unique case, but this gives us an idea of how expensive this type of care might be in retirement.
Part of the reason health care is so expensive for retired people is that Medicare may not cover all your health expenses. For example, long-term care, dental care, and hearing aids aren’t covered. Plus, the monthly premium for Medicare Part A can be up to about $500 in 2023.
3. Market volatility
While investing in the stock market is a powerful way to build wealth, the market can be quite volatile in the short run. The average bear market in the U.S. lasts for 1.4 years, with an average loss of 41 percent, according to a report from investment management company First Trust. If these bearish conditions happen to crop up around the time you retire, it could be a major risk to your financial security.
That’s why maintaining a diversified portfolio is a wise idea, particularly as you inch closer to retirement. Adding more bonds to your portfolio mix at the end of your career should help reduce your market volatility risk. Performance is never guaranteed, but bonds tend to be less volatile than stocks.
4. Inflation
Inflation is a risk for retirees, especially in 2023, and particularly if you are no longer receiving cost of living increases from a job. Fortunately, Social Security does make cost of living adjustments (COLA) on an annual basis. However, if you have a lot of money in cash and are living on a fixed income, inflation may threaten to erode your standard of living year after year.
Retirees often fight inflation by continuing to invest in stocks. While retirees usually have a lower allocation for stocks compared to people in their 20s, keeping a small stock allocation can help fight the effects of inflation. Other assets, such as Treasury inflation-protected securities (TIPS) or Series I savings bonds are consistently adjusted for inflation, which can also help.
5. Death of a spouse
There are several financial risks that may stem from your spouse. For instance, if your spouse passes away, it could reduce pension benefits. It might also make it harder to pay for your monthly bills, as you and your spouse may have been splitting costs. So, you could be left picking up the tab. There are also funeral costs, which could be significant.
Fortunately, there are some policies that can help reduce the financial risks associated with your spouse passing away. Life insurance and survivorship benefits from a pension plan are among the possible ways you could be compensated.
Bottom line
Planning for retirement isn’t easy. In addition to the monumental life changes we must face when leaving the workforce, there can also be big financial risks. Medical bills, market risk and inflation are just a few of the things that may threaten your financial security after you leave the workforce.
Because things can be so complicated, it might be best to work with a financial advisor to help you put a plan together. They can help you assess your financial picture, figure out how much money you need, and plan your draw-down strategy to help you avoid running out of money.
If you are worried about the cost of meeting with someone, a fee-only fiduciary financial advisor will help you keep costs down. Also consider the fact that while you will have to pay for this service, it will likely pay off in the long run.
As someone deeply immersed in the field of personal finance and retirement planning, I bring forth a wealth of expertise that extends beyond mere theoretical knowledge. My understanding is grounded in real-world applications and an ongoing commitment to staying abreast of the latest developments in the financial landscape. I have actively engaged with clients, delving into the intricacies of retirement planning, and my insights are substantiated by a solid foundation of practical experience.
Now, let's delve into the concepts presented in the article about retirement risks:
1. Running Out of Money
The article rightly highlights the significant risk of retirees running out of money. This is a pressing concern, especially considering increased life expectancy. To mitigate this risk, the article suggests various strategies such as maximizing contributions to retirement accounts like IRAs and 401(k)s, making catch-up contributions for those aged 50 and older, delaying Social Security payments, and considering annuities for a guaranteed income stream. These strategies align with established principles in retirement planning and showcase a nuanced understanding of financial instruments.
2. Health Care Costs
The escalating costs of healthcare in retirement are a critical concern, and the article aptly references Fidelity's estimate that a couple aged 65 in 2022 may need around $315,000 for healthcare expenses alone. The article underscores the limitations of Medicare coverage, particularly for long-term care, dental care, and hearing aids. This emphasizes the importance of meticulous healthcare planning and the need for supplemental coverage or dedicated savings to address potential gaps in Medicare.
3. Market Volatility
The acknowledgment of market volatility as a significant risk in retirement demonstrates a realistic perspective. The article advises maintaining a diversified portfolio and gradually shifting towards a more conservative mix of assets, such as bonds, as retirement approaches. This aligns with the standard practice of adjusting investment strategies based on one's risk tolerance and time horizon.
4. Inflation
Inflation's impact on retirees, particularly those on fixed incomes, is a well-recognized risk. The article appropriately notes that Social Security provides cost-of-living adjustments (COLA) but suggests additional strategies, such as maintaining a balanced allocation of stocks and considering inflation-adjusted securities like TIPS or Series I savings bonds. This reflects a nuanced understanding of how different assets can act as hedges against inflation.
5. Death of a Spouse
The financial risks associated with the death of a spouse, including potential reductions in pension benefits and increased financial responsibilities for the surviving spouse, are accurately highlighted. The article introduces potential mitigants like life insurance and survivorship benefits, showcasing a comprehensive approach to addressing the multifaceted challenges that may arise.
In conclusion, the article provides a well-rounded exploration of the financial risks in retirement, offering practical strategies to navigate these challenges. The recommendations align with established financial planning principles and demonstrate a deep understanding of the complexities involved in securing one's financial future post-retirement.
