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, strategies for reducing or managing 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 strategies that requires thought, knowledge, and experience.
No one can predict how long he or she will live. This complicates planning since a retiree has to preserve an adequate stream of income for an unpredictable length of time.
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.
When taking withdrawals from a portfolio during retirement to fund income needs, there is a potential risk that the rate of withdrawals can deplete the portfolio before the end of retirement.
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.
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.
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.
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.
The risk of potential financial loss resulting from movements in market prices.
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.
Liquidity risk is the inability to have assets available to financially support unanticipated cash flow needs.
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impact on how long a portfolio will last if the portfolio is in the distribution stage and if a fixed amount is being withdrawn from the portfolio.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.
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.
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.
Employer provided retirement benefits are an important part of retirement confidence for many. If the employer has financial problems, employees may lose their jobs and, in some cases, their benefits.
The loss of a spouse is a major personal loss, but without planning can also result in a decline in economic security.
Many retirees have additional unanticipated expenses during the course of retirement, in many cases due to family relationships and obligations.
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.
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.