How to prepare for retirement risks

Risks are unavoidable, but you can prepare for them. A well-rounded retirement strategy should incorporate expectations for risk, and in some cases, it may make sense to insure against them.  Here are some the top risks to your retirement as well as some actionable tips for how to prepare for them, or view our webinar, "Risks to Your Retirement" to learn more.

Before retirement

Putting off saving for retirement

When retirement is decades away, it can be tempting to put off saving for it. But the cost of waiting can be significant. That's because how long you save is one of the most impactful factors in how much you accumulate for retirement. Plus, the earlier you start saving, the less you may have to put away each month to help meet your retirement goals. Also, keep in mind that when you retire isn't always a choice. Roughly one-third of pre-retirees expect to retire before age 65, but more than two-thirds actually do, according to the 2023 EBRI Retirement Confidence Survey.

Not taking enough investment risk

The biggest risk you face is not in the stock market – it's not reaching your retirement goal. When you're many years from retirement, you can generally afford to take more investment risk and allocate more of your portfolio toward investments with higher return potential, such as stocks and stock mutual funds. While it's still important to own some bond investments for diversification, you should generally lean more toward growth investments because it's difficult to meet long-term goals with only short-term investments.

The Rule of 72 illustrates this point. With this general rule of thumb, you take 72, divide it by your portfolio's expected return, and that’s about how long it will take your money to double. Therefore, earning a 6% return will take just about 12 years to double, a 3% return will take nearly 24 years, and a 1% return will take more than 70 years to double!

Financial emergencies

If you were faced with a large, unexpected expense, such as a major home repair, or you encountered a gap in employment, would you be financially prepared? If you weren’t, you might be forced to dip into your long-term investments. This could result in taxes and penalties, and you may be faced with selling them when their value is down.

To help prevent this scenario or to avoid taking on high-rate debt, we recommend building an emergency fund containing three to six months’ worth of total expenses, with the money kept in an easily accessible, low-risk account that holds cash and cash equivalents. Importantly, you’ll want to make sure that your emergency fund is separate from any account you use for your everyday expenses. You should also maintain adequate insurance coverage for health care expenses as well as valuable assets, such as your home, vehicles and collectibles.

Disability

About 1 in 4 workers will experience a disability lasting longer than 90 days during their working years, according to the Society of Actuaries. To protect you and your family, we recommend having a strategy in place to replace 100% of after-tax income (if possible) in the event you or your spouse become disabled. For short-term disabilities (those lasting fewer than six months), your strategy may include emergency savings, short-term group disability benefits or a combination of both. For long-term disabilities, consider a long-term disability insurance policy to help you cover necessary expenses and any additional medical costs that should arise.

Premature death

If you or your spouse unexpectedly passed away, how would it impact your family? Could they stay in the same house? How will the surviving spouse care for the kids? What about your children's education expenses? Adequate life insurance for you and your spouse can help your family continue to maintain their standard of living in the event of your untimely passing as well as help ensure long-term goals, such as paying for college, can still be met. It can also help the surviving spouse avoid disruptions to or reductions in employment to meet caregiving needs, reductions in how much they're saving each month toward retirement and tapping their retirement accounts early to make ends meet. In addition to life insurance, having core estate documents in place can help ensure your and your spouse's wishes are carried out as you want.

Nearing or in retirement

Longevity

Thanks in part to improved medical care, people are living much longer than they did in the past, which means your retirement savings may need to last 25 or 30 years. In fact, a 65-year-old 
couple has about a 60% chance at least one spouse will live past age 90, according to the Society of Actuaries.

To help reduce the risk of outliving your assets, we generally recommend planning for a long life expectancy. As a starting point, we recommend men plan to live to age 91 and women plan to live to age 93, adjusting as appropriate for known medical conditions and family history. Those planning for a long life expectancy may want to delay claiming Social Security and/or consider an annuity that provides a guaranteed lifetime income stream to help provide longevity protection for them and their spouse. Starting with a more conservative withdrawal rate can also help ensure your investment portfolio lasts through retirement.

Health care expenses

Health care is one of the largest expenses a retiree will face, and affording health care can be a source of anxiety for many retirees. Before age 65, we recommend exploring your ability to use a health savings account (HSA) to save for qualified medical expenses you may have in retirement and maintaining health insurance before you're eligible for Medicare. Once you're approaching age 65, we recommend exploring your Medicare options and deadlines for enrollment to ensure you're adequately insured.

A longer life expectancy also increases the likelihood of a long-term care event. Long-term care can be costly and is generally not covered by Medicare. Because the risk of a long-term care event is fairly likely, and the need can be significant, we recommend you put a plan in place in case you need care. Be sure to incorporate long-term care expenses into your retirement plan and determine how best to meet them – with your own assets, insurance or a combination of both.

Market volatility

At this point, you've likely been investing for a while, so you know that financial markets will always go through ups and downs. Consequently, your retirement strategy should incorporate expectations for market volatility when assessing your ability to meet or remain on track for your goal. As you get closer to retirement, you'll also generally want to become more balanced between stocks and bonds, continuing to reduce your allocation to stocks over time as your time horizon in retirement shortens.

Market downturns during your early retirement years can be especially impactful and heighten the risk of running out of money. To help address this risk, we recommend retirees maintain one year of portfolio withdrawals in cash and three to five years of portfolio withdrawals in a CD or short-term fixed-income ladder. Maintaining an appropriate allocation of cash and short-term fixed- income investments can help you avoid having to sell your stocks in a down market to meet your retirement spending needs, allowing your stocks more time to recover. We also recommend being flexible with your spending should a downturn occur. Most retirement spending plans assume you increase your spending each year to account for inflation. Not taking these raises and even potentially decreasing your spending in down years could increase the longevity of your investment portfolio.

Inflation

You should expect your expenses to increase over time and incorporate these inflation expectations into your retirement strategy. As a starting point, we generally recommend assuming a 3% inflation rate, although you may want to assume a higher rate of inflation for some expenses, like health care. Because of inflation, you'll also likely need to maintain some allocation to stocks in retirement as fixed-income investments provide little growth potential to help meet rising expenses. Finally, starting with a more conservative withdrawal rate can increase the likelihood you’ll be able to take higher withdrawals years from now when your expenses may be higher.

Unexpected expenses

If you're no longer working or working on a reduced income, your ability to withstand an unexpected expense may be more limited. As a result, it's still important to maintain an emergency fund in retirement to help cover unexpected expenses. Like pre-retirees, we recommend retirees keep three to six months’ worth of total expenses in a liquid, low-risk account that holds cash and cash equivalents. This is in addition to the cash set side to meet expected retirement expenses. You should also maintain adequate insurance coverage for valuable assets, such as your home, vehicles and collectibles.

You don't have to prepare alone

Your financial advisor can help you understand the potential impact of life's "what-ifs" on your goals and partner with you to create a comprehensive strategy to help you prepare for them. Life may be full of surprises, but with the right guidance and assistance, you can be ready for just about anything.