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18 Risks Faced in Retirement

It's a tough task to evaluate all the risks that retirees face, and to develop a plan to address each one.  To make it harder, solutions for reducing or eliminating one type of risk may actually increase another type of risk.  This page identifies 18 risks in six different categories.  Almost every risk described here requires a carefully crafted, balanced set of solutions that requires thought, knowledge, and experience.

Risks of Outliving Resources

Longevity Risk

Longevity Risk

No one can predict how long he or she will live.  This complicates planning since a retiree has to secure an adequate stream of income for an unpredictable length of time.

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Inflation Risk

Inflation Risk

When working, inflation is often offset by an increased salary.  In retirement, inflation reduces the purchasing power of income as goods and services increase in price, impeding the retiree's ability to maintain the desired standard of living.

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Excess Withdrawal Risk

Excess Withdrawal Risk

When taking withdrawals from a portfolio during retirement to fund income needs, there is a risk that the rate of withdrawals will deplete the portfolio before the end of retirement.

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Risks Associated with Aging

Health Expense Risk

Health Expense Risk

For those that had employer health care coverage, retirement may mean paying more for medical insurance.  Even with insurance, some expenses will be paid out of pocket.  Also, chronic or acute illnesses may mean more significant and unexpected out of pocket expenses.

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Long-Term Care Risk

Long-Term Care Risk

Chronic diseases, orthopedic problems and Alzheimer's can restrict a person from performing the activities of daily living, which will require financial resources for custodial and medical care.

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Frailty Risk

Frailty Risk

Frailty risk is the risk that, as a result of deteriorating mental or physical health, a retiree may not be able to execute sound judgment in managing his or her financial affairs and/or may become unable to care for their home.

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Financial Elder Abuse Risk

Financial Elder Abuse Risk

The possibility that an advisor, family member or stranger might prey on the frailty of the retiree, might recommend unwise strategies or investments, or might embezzle assets.

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Investment Risks

Market Risk

Market Risk

The risk of financial loss resulting from movements in market prices.

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Interest Rate Risk

Interest Rate Risk

Technically, this is the risk that arises for bond owners from fluctuating interest rates.  How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.

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Liquidity Risk

Liquidity Risk

Liquidity risk is the inability to have assets available to financially support unanticipated cash flow needs.

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Sequence of Returns Risk

Sequence of Returns Risk

Investment returns are variable and unpredictable.  The order of returns has an impact on how long a portfolio will last if the portfolio is in the distribution stage and if a fixed amount is being withdrawn from the portfolio.  Negative returns in the first few years of retirement can significantly add to the possibility of portfolio ruin.

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Work Risks

Forced Retirement Risk

Forced Retirement Risk

There is always the possibility that work will end prematurely because of poor health, disability, job loss, or to care for a spouse or family member.  This event can quickly derail a retirement plan.

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Reemployment Risk

Reemployment Risk

Many retirees plan on working in retirement.  Reemployment risk is the inability to supplement retirement income with employment due to tight job markets, poor health and/or caregiving responsibilities.

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Employer Insolvency Risk

Employer Insolvency Risk

Employer provided retirement benefits are an important part of retirement security for many.  If the employer has financial problems, employees may lose their jobs and, in some cases, their benefits.

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Family Risks

Loss of Spouse Risk

Loss of Spouse Risk

The loss of a spouse is a major personal loss, but without planning can also result in a decline in economic security.

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Unexpected Financial Responsibility Risk

Unexpected Financial Responsibility Risk

Many retirees have additional unanticipated expenses during the course of retirement, in many cases due to family relationships and obligations.

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Other Risks

Timing Risk

Timing Risk

Also known as point-in-time risk, timing risk considers the variations in sequences of actual events that can have a significant impact on retirement security.  There are just some factors outside of your control.  Depending upon when you retire, you may, for example, face high inflation or low interest rates.

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Public Policy Risk

Public Policy Risk

An unanticipated change in government policy with regard to tax law and government programs such as Medicare and/or Social Security can have a negative impact on retirement security.

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