chevron-down Created with Sketch Beta.


Experience January/February 2024

The Six Risks of Retirement and How to Address Them

Alap Patel


  • Ensuring you have a comfortable retirement requires that you address head on the biggest moving parts of your financial plan.
The Six Risks of Retirement and How to Address Them

Jump to:

Retirement is supposed to be comfortable, fun, and relaxing. The process to get there, however, can be stressful, tiring, and arduous.

The transition from living your life with a mentality focused on saving to spending the money you’ve put away is significant. Addressing the six major risks you’ll face during your decades of retirement are paramount to easing you into that comfortable, fun, relaxing lifestyle you’re striving for.

What you’ll need to face

Of course, I’m not here to provide legal or tax advice. But I can offer financial advice. With that in mind, what are those six risks you’ll need to address?

  • Longevity
  • Market volatility
  • Inflation and taxes
  • Health care
  • Long-term care
  • Your legacy

These risks don’t live in silos. They’re better viewed as puzzle pieces that need to fit together in your own, personalized plan. These risks are also not static. Addressing them before they become an issue will not only ease your transition into retirement but also reduce potential anxiety throughout your retirement years.

How long will you live?

The biggest concern people have as they approach retirement is running out of money. According to proprietary research conducted by Northwestern Mutual in 2023, 81 was the average self-reported life expectancy by high-net-worth pre-retirees and retirees. However, 100 is the age for which data and aging experts say you should plan.

This nearly 20-year gap between expectation and reality highlights that longevity may come with risks to your plans for retirement. So how do you ensure you won’t run out of money?

The primary tool is to have a guaranteed stream of income that will last as long as you do. For most of us, Social Security is that base amount. Others are fortunate enough to also have a pension, though those are becoming rarer.

This is also where an annuity can come into play. If you truly want peace of mind that you won’t outlive your money, having a large enough paycheck from these three sources of guaranteed income is your starting point.

Prepare to weather market shifts

If you retire at 60 and live until 100, you still have 40 years of market volatility in front of you. To put it in other terms, you’re still a long-term investor. Many retirees make the mistake of becoming too conservative too quickly, and they don’t realize the investment gains that they need to cover expenses later in life.

As an example, a person fearful of the market might reduce their portfolio risk at retirement. Perhaps their expected return might drop from 8 percent to 7 percent as a result. If you invest $1 million over 40 years and withdraw $75,000 per year over that time frame, you’ll be looking at an ending value of close to $2.3 million versus running out of money. A 1 percent return might not seem like a lot, but compounded over 40 years, it could be the difference between maintaining or growing your principal versus depleting your assets.

Put yourself in a position where you’re only taking on risk you can afford, and remain disciplined. Ideally, between your sources of guaranteed income and safe assets (such as cash, CDs, or permanent life insurance), you should position yourself where you can withstand a two- to four-year market decline. This will help alleviate the short-term pressures of market volatility and allow you to continue to remain disciplined and maintain a long-term view with your remaining well-diversified portfolio.

In other words, don’t put your ability to pay for groceries, utilities, and your property taxes at the whim of a short-term market movement. But do position yourself to be able to afford increasing costs in retirement, like health care.

Make room for inflation and taxes

You’ll retire, but taxes and inflation won’t. Taxes represent the largest expense for many—if not most—retirees.

Diversifying how you save is just as important as diversifying how you invest. Putting money into different accounts that are taxed differently throughout retirement can help you navigate changing tax laws. You may not be able to control how the government taxes you, but you can certainly control your reaction to it.

As an example, imagine if you need to generate $100,000, after taxes, from your portfolio to sustain your lifestyle. If all your money is in a traditional IRA, you’ll be taxed at ordinary-income rates for the entire withdrawal.

But imagine if tax brackets are set up such that the first $50,000 you withdraw is taxed at 12 percent and the remaining withdrawal is taxed at 22 percent. You’d need to withdraw close to $122,000 from your IRA to net $100,000 after taxes.

Instead, what if you withdrew $50,000 from your IRA and another $56,000 from a Roth IRA, where distributions are tax free? You’d still net $100,000 after taxes, but you’re only withdrawing $106,000 from your portfolio. That’s a lot more money in your pocket and a lot less being sent to the government.

With a better tax strategy, you can keep more of your money growing in your portfolio, which will help offset long-term inflation as well. Just like with taxes, you can’t control inflation. But you can plan for it.

Understanding your budget can help you navigate long-term costs. Some expenses, such as travel, may not factor into your budget as you get into your 80s and 90s. Other expenses, such as health care, may significantly exceed the general rate of inflation.

Covering the cost of good health

Speaking of health care, many people postpone retirement until 65 purely to avoid paying for health care before Medicare is available. If you’ve done a good enough job saving, it may warrant looking into the cost of health care prior to turning 65 to see if an early retirement is feasible.

In the same vein, early retirees may not factor in health care costs since those expenses aren’t always part of their day-to-day budget. Be prepared to pay for the monthly premiums and deductibles you may encounter.

And remember that your health is different from other people’s health. So finding coverage that best fits your needs may be more or less expensive. Medicare Part A, which covers hospital visits, won’t require a monthly premium so long as you’ve paid your Medicare taxes while working.

Medicare Part B, which covers doctors’ visits and outpatient care, does have a monthly premium, which increases based on your income. It can be as low as $164.90 and as high as $560.50 per month. Medicare Advantage (Part C), which some people chose, and Part D (which covers drug costs) will vary based on your plan.

Are you covered for extended care?

Long-term care is the great boogeyman when it comes to retirement. With more Americans living longer, this is a relatively newer problem facing retirees.

In fact, many insurance companies that offered long-term care insurance in the past either no longer offer it or sold their long-term care line to another company because their losses were too high. Even the industry didn’t realize how major of an issue long-term care was becoming.

Generally speaking, half of Americans who live past 65 will develop a need for long-term care services, according to a 2021 report from the U.S. Department of the Treasury. Long-term care is generally not covered by Medicare, and it remains an ongoing stressor for retirees who haven’t addressed the risk as they continue to live in retirement.

Many retirees opt to either self-insure or ignore this risk entirely. Self-insuring against long-term care would require you to allocate a significant amount of your savings—money that could otherwise be spent on fun things in retirement—for an event that may or may not happen and may or may not be more expensive than what you’ve saved.

Ignoring the risk entirely could put your entire estate at risk. It could also create significant financial, physical, and emotional burdens on your family.

Many kinds of insurance policies can help cover the costs of a long-term-care event, including standalone policies, hybrid policies, and life insurance policies with a long-term-care rider. Finding the right policy for you can be daunting.

My suggestion is to remember that, without being able to predict the future to know exactly what you’ll need and when you’ll need it, you won’t find the perfect policy. Find one that’s affordable within your retirement budget and gives you peace of mind that your risk has been addressed.

And I’d be remiss if I didn’t mention that not every insurance company is built the same. Finding a reputable company that’ll likely continue to service your policy indefinitely is important. Remember, low costs are great. But insurance companies show their value (or lack thereof) when you actually need them.

Protecting your financial legacy

Your legacy will represent a well-executed retirement plan. Despite the chaos of the world and the uncertainties of life, developing a strategy that allows you to spend your money with confidence that you won’t run out ultimately leads to having money left over.

Aside from some of the more technical strategies to mitigate paying estate taxes, giving thought to with whom you want to spend the excess—and when you want that money spent—is an important part of the planning process. Without giving it some thought and strategy, it’s likely that more of your money will go toward taxes or the cost of care and less will go toward sources you might prefer, such as your children, charities, or even yourself in the form of a more comfortable lifestyle during retirement.

Directing money to your kids might involve converting some of your traditional IRAs into Roth IRAs during retirement proactively paying the taxes due, and then allocating the Roth IRAs more aggressively to allow larger, tax-free funds to be inherited. Leaving more for charity might mean taking only minimum distributions from your IRA and naming charities as the beneficiary so they can receive those funds tax-free.

These six risks and their potential solutions all intertwine. Don’t let your lifetime’s worth of work and saving collapse by downplaying or ignoring these risks and how their solutions can fit together.