When a person retires, there are many unforeseen circumstances that can occur that may negatively impact their funds. These are known as retirement risks, and it's important to learn about them before you enter your retirement years. Knowing about the different risks can help you prepare and mitigate their effects by taking steps such as growing your retirement savings or making investments that can offer high returns once you officially retire. Here are three common retirement risks, along with tips for how to overcome them and ensure you're covered into retirement, no matter what you face.
What is retirement risk?
Retirement risk refers to an event that can threaten a person's ability to retire comfortably. These often involve a financial component, as it can be especially important for retirees to have a good amount of savings before they officially leave the workforce. When these savings are used too quickly due to unforeseen events, it can result in challenges like not being able to pay for bills or other essentials. For example, if a retiree purchases a home earlier in their life that ends up needing expensive repairs after they retire, it can count as a retirement risk.
3 common retirement risks
Outliving Your Savings
One of the most common retirement risks is the prospect of someone outliving their savings. This occurs when unforeseen costs arise at a rate that's too rapid for your savings to support, which can cause you to run out of money. For example, if you save a certain amount based on a particular budget, then encounter a surprise expense, it may throw off your budget and drain your savings. This can be especially dangerous for retirees, as many retirees depend on their savings to cover their cost of living and health expenses throughout their retirement.
Stock Market Changes
Another retirement risk is the occurrence of changes in the stock market. Since many retirees use investments to supplement their income, sometimes both before and after retirement, it's often crucial for them to maintain profitable portfolios. When there's volatility in the market, this may cause the price of important stocks to decrease, resulting in a shrinking or less valuable portfolio. If this occurs after you've retired, when it's time to begin withdrawing your assets, it can reduce your return on investment drastically.
Medical Expenses
Medical conditions that arise by surprise can be another retirement risk that's detrimental for retirees. This can include short-term conditions and long-term illnesses or injuries that involve steep medical bills and repeated visits to the doctor. While many retirees have insurance, unforeseen medical bills can still be a challenge, especially if you have a fixed amount of funds to last for the rest of your retirement. An example of this could be breaking a bone or developing a chronic medical condition due to advanced age or exposure to hazards.
Ways to protect yourself against retirement risk
There are several ways to protect yourself against retirement risks. One of the most effective ways is to build a considerable retirement savings account that can last you many years. To mitigate the impact of surprise medical conditions, you can consider a health savings account that you may use to pay for healthcare expenses. Planning for unforeseen medical costs as early in life as possible can also help reduce the chances of being negatively affected by them when they occur. There are also many online resources that can help you determine the best methods of overcoming retirement risk for you.
You can also make investments to supplement your retirement savings, such as by purchasing annuities. A fixed annuity promises a minimum return on your initial investment, and this can be ideal for retirees who want to invest money now that they can access later in life. Another option is a single premium immediate annuity, which gives investors an additional stream of income that they can use immediately. A variable annuity is another option that involves saving tax-deferred funds over time and then later accessing a stream of income during their actual retirement years.
These are three of the most typical risks that can be potentially stressful for retirees. If you're nearing retirement or just planning ahead, you might consider researching which retirement risks you could be most susceptible to. This can help you formulate a plan and ensure your savings can support you throughout difficult times, should they occur. With many options to explore, you're likely to find the perfect way to overcome retirement risk and sit back, relax, and enjoy your free time.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
