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 when it comes to their finances.
Older Americans might be aware of some of the risks, though. Bankrate’s Financial Outlooks survey from December 2023 found that just 20 percent of baby boomers thought their finances would improve in 2024, compared to 37 percent over all generations. 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 5 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, regardless of how old you are. 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. To help you get back on track after 50, you can make catch-up contributions beyond the typical limit to tax-advantaged retirement accounts.
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 could 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. A 65-year-old may need as much as $165,000 in after-tax savings to cover health care costs throughout retirement, up about 5% from 2023, according to the 2024 Fidelity Retiree Health Care Cost Estimate. The exact cost may vary widely in each unique case, but this gives us an idea of how expensive health 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. Bear markets often occur in the period before an economic downturn, and largely indicate that investors are starting to pull back. 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, 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 and ignoring short-term market fluctuations. While retirees usually have a lower allocation for stocks compared to people in their 20s, keeping a small stock allocation is important because some companies are able to weather high costs better than others. 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 losing your spouse. For instance, if your spouse passes away, pension benefits may be reduced. You might also have a harder time paying monthly bills if you and your spouse were splitting costs. You could be left picking up the tab alone. 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.
— Bankrate’s Logan Moore contributed to an update.