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WE’VE ALL HEARD THE maxim that “without risk, there’s no reward.” Over the years, we’ve all taken countless risks—big and small, financial and otherwise—to get to where we are today.
Every activity has a risk associated with it, and that includes retirement. It’s best to be aware of these risks and, when prudent, take steps to limit them. Here are nine risks that retirees face.
1. Health. Even if we’re fortunate to enjoy a long, active retirement, our health may not be great in our later years. Alternatively, even if our own health holds up, our spouse may have medical issues.
On top of that, we’ll likely face escalating health costs as we age. I’ve watched a friend move from independent living to assisted living to a nursing home to memory care. Each move was progressively more expensive. Good planning is needed to manage such life-changing events.
2. Longevity. I met a retiree at a party who said, “My mother passed away at 70 and my father at 72. The chance of me reaching my 90s is virtually nil. My plan is to spend more and enjoy life while it lasts.”
A wise move? No matter what our family health history, it’s risky to assume we won’t enjoy a long life. And even if we don’t live to a ripe old age, our spouse may.
3. Market downturns. While the stock market has returned an average 10% a year over long stretches, a major drawdown of 20% or more could happen at any time. When we were young, we had many years to recoup such losses. But once we’re retired and drawing on our portfolio for spending money, our time horizon is often considerably shorter. A balanced portfolio of stocks and bonds can help reduce this risk.
4. Spending. We can’t control how the financial markets perform, but we can control our own spending—and avoid the excesses that can put our retirement at risk. My advice: Prior to buying anything, consider whether it’s a need or want.
5. Family. Our retirement plan could be derailed by a host of family issues, whether it’s divorce, the need to support adult children, paying for children’s or grandchildren’s college costs, the death of a spouse and estate-planning mistakes.
6. Inflation. Most employer pensions aren’t indexed to inflation. Our pension might seem ample when we first retire. But a decade later, the buying power will be much reduced. As with many risks listed here, ample savings are likely our best defense.
7. Scams. Thieves are using increasingly sophisticated techniques to target seniors. We’ve all heard horror stories of investors losing huge sums to trickery and to get-rich-quick schemes. You no doubt recall the saying, “If something sounds too good to be true, it probably is.” Those words are worth bearing in mind.
8. Known unknowns. Think about threats such as flooding, fire, hurricanes, long-term-care costs, accidents and lawsuits. We know these are all possibilities, but we don’t know when or if they’ll come to pass. Still, we can prepare.
9. Unknown unknowns. Consider the recent pandemic. The world was unprepared and billions of lives were turned upside down. We can’t make specific preparations for threats we’re unaware of, but we can make sure our financial life can withstand large, unforeseen shocks.
I’ve spent time thinking through the above risks, and I believe it’s helped me to make more rational financial choices. Maybe we should all take our cues from the quote that’s sometimes wrongly attributed to Mark Twain: “I am an old man and have known a great many troubles, but most of them never happened.”
Sundar Mohan Rao retired recently after a four-decade career as a research and development engineer. He lives in Tampa in a 55-plus community. Mohan’s interests include investing, digital painting, reading, writing and gardening. Check out his earlier articles.
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I graduated high school in 1968, Our class motto was taken from the famous “Serenity Prayer,” by Karl Paul Reinhold Niebuhr.
“O God, give us the serenity to accept what cannot be changed, the courage to change what can be changed, and the wisdom to know the one from the other.”
I have spent my entire adult life trying to live the words of this prayer. I know I can’t control anything except my own thoughts, words, and actions. Only those three things are in my control.
Few if any of the enumerated risks in this article can be controlled by you, or me. What can be controlled is how you choose to react to each of those risks.
Through planning and saving and intelligently investing, we can have an influence on the enumerated risks, but in the end, all we can really control is our own reactions to whatever life throws in our path.
Thanks for a thought provoking article Sundar.
” Serenity Prayer” is a great way to navigate through many ups and downs in life. This is a gem. Thanks for sharing this.
Sundar Mohan Rao
We are fortunate to be able to prepare for these risks. How difficult it is for a refugee, migrant worker or poor third world farmer to manage his/her life. The starting point, the time and place one is born are risks out of our control. Thank you lord for even 60% income replacement !
This is a good list, very thorough. For the last two years we’ve had to extensively help an adult child after she was seriously injured in two car accidents 14 months apart. (She’s going back to work starting tomorrow night for the first time since her second accident last July. She’s a server/bartender and had the world’s worst broken ankle. Big milestone.) Anyway, this was money we could have been squirreling away for our impending retirements, but such is life. We’ll be OK.
The longevity question is one I puzzle over. My father died at 61, so at 63, I’ve already passed him up. My two grandfathers both died of heart attacks (like my dad) while still in their 60s, and my paternal grandmother died at 72 of lung cancer (she’d been a smoker as many were in that generation). My maternal grandmother made it to 87 and my mom is 82 and counting. Not sure where all that leaves me.
Years from now, when you look back on your life, the help you provided to your child will be one of the most important things you ever did. Glad she has recovered. All the best to her!
Regarding #3 Morningstar’s most recent research calculated that with today’s projected interest rates one should be able to follow the 4% “rule” for withdrawals for 30 years with as little as 20-40% of one’s portfolio in stocks. I have been comfortable with a 50/50 portfolio, but now am in the process increasing of our bond position to 40% through dollar cost averaging over this year. I hold to the investing policy of something to the effect of, be fearful when others are greedy, and greedy when others are fearful. I think it is Warren Buffett’s or the late Charle Munger’s philosophy.
you are already 50/50, so do you mean you are increasing your bond position to 60? 40 means you’d be decreasing your bond allocation.
Corrected, thanks!
I loved your closing paragraph! Many great quotes are attributed to Twain, Yogi Berra, even Einstein, when they may not have said them. And even when they actually did, I often wonder whether they simply repeated something they once heard someone say, and may not even remember who. Regardless, a clever one-liner is still memorable, no matter who first said or thought it!
Great list Sundar,
I believe health and longevity are today’s primary concerns moving forward. Particularly for many born in the 40s, 50s or before. The upper ‘10% seem curiously focused on its own individualization.
This country might in fact be the next Venezuela or Lebanon with its unabated.gov bloat, and policies. Not to mention financial mis-management. Musk fired everyone at twitter-(X).to cut its bloat to survive profitably, and it worked.
Musks had revolutionary thinking with transportation, housing, with space colonization now on the table.
War no more…against earths current known history!
I believe histories currently being rewritten.
Musks thinking is certainly unique, and financially prudent. He sold 3 multi-million mega homes for a box-able family spot to live and Brian Johnsons 46, with the health stats of a 20yr old w/his x-lifestyle.
The times, they are a changing was once said.
As George Burns said “Getting old is mandated, growing up is not’” in my understanding.
BrainyQuotes.Todays youths bring innovative thinking.
Thats my interpretation and good news for all, new ideas like Musks unique thinking is needed for all to survive and prevail, not exclusively Musk of course
Hopefully avoiding a mass extinction.
Good list, Sundar, although I have to point out that many people enter retirement without a spouse. Long term care is an even bigger concern for singles. I have dealt with that issue, along with running out of money, by entering a CCRC (continuing care retirement community) that promises not to throw me out if I run out of money.
Good list Sundsr. I’ve seen or experienced all of these myself, with family, or with friends. Thanks for the Twain “quote” – I’d forgotten that gem.
Sundar, I’ve thought about all these risk for many years and I think about at least one every day now although which one varies by my mood.
But for me it all comes down to having enough income and assets when a person retires.
Reading your list and thinking about the unknowns of the future I cannot conceive how it is prudent to think a lifelong secure retirement can be had when starting with say 60,70 or 80% income replacement ESPECIALLY for individuals of average or modest means.
Even one item on your list can cause plans to derail pretty quickly. In my opinion the greatest risk is the one that requires excess withdrawals from retirement income assets.
“In my opinion the greatest risk is the one that requires excess withdrawals from retirement income assets.”
One of the great things about being an American is our right to have and voice our own opinions. You have stated yours.
I disagree with your choice for “greatest risks,” because were it to become necessary to take “excess withdrawals.” you would also have the option to reduce spending. number of the other stated risks have no alternative. I am thinking specifically of Health and Longevity.
I have never subscribed to the 70% -80% etc. numbers for required retirement income, because people make choices and those choices affect the numbers required. My wife and I have social security of $72,144 annually. Our total expenses total $61,000, including 10% Charitable giving and an annual vacation fund of $10,000. We do not live on our investments, and will not need to in the foreseeable future. However, I didn’t retire until this year, at age 73. (Wife is 69). Were I to decide to draw down my investments for lifestyle spending, with my life expectancy of 87 years, I can afford to take 5-6% from our portfolio. If I were 66 or 67, the numbers would necessarily be lower. If I live longer than 87, I have a plan B.
To fund Plan B, I purchased 4 annuities, FIAs with Income Riders. These can be turned on whenever we choose to. These annuities are in place to account for inflation risk, market risk, sequence of returns risk, etc.
To combat health risk, I am on a carnivore diet (30th week) and I am going to the gym a minimum of 3 days per week, for weights and cardio. I have lost 55 pounds and lowered my A1c from 6.4 to 5.7 in 30 weeks.
Plan B doesn’t seem necessary considering SS is plenty and you have investments, but maybe I am missing something.
I guess it depends on how people define prudence. Some folks might see it as prudent to prioritize freedom over higher income replacement. Others more prone to worry or have nothing exciting on their bucket lists might rather see time go by at the office. Then as you say they’ll be some who prioritized freedom only to regret later for lack of money. BUT then again, it is common knowledge that folks on their deathbeds never regret not having worked more.
Considering my bias for worry, I’m with Mr. Quinn as far as my own income is concerned. At some point in the future when the opportunity arises for excess withdrawals I will raise my fist and exclaim,” bring it on!”
Quoting from today’s Jason Zweig newsletter (Intelligent Investor),
“We shouldn’t laugh at how foolish other people are. We should laugh at ourselves for thinking we could never be as foolish as they are.“
In my opinion the greatest risk is the precious remaining time in your life that is wasted by over-thinking about financial hazards. The hour you spend daily pondering one financial risk or another is an hour lost that you will never get back. And I seriously doubt that in their final moments before departing this world, anyone wishes they had spent more time thinking about money.
Continuing to work when you don’t need to could also be considered a risk, depending on how much you like the job. I would have missed out on a decade or more of travel if I had followed Dick’s replacement rule.
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We’ve been over this as recently as Friday. If I am living on 60% of my income while working, there is no reason I can’t live on the equivalent of 60% of it in retirement. Plus healthy savings for emergencies.
“Equivalent?”
I agree. If you’re somebody who has to fund your retirement from savings — and hence you’re used to saving a big chunk of your income, along with paying Social Security and Medicare payroll taxes — it should be possible to live comfortably on far less than 100% of your old pretax income once you’re retired. Maybe it’s a different story if you had a pension that pretty much replicates your old salary, and hence you didn’t need to save like crazy. But most of us aren’t so fortunate!
Do most Americans say those around the median household income save like crazy?
I’m sure some do and many don’t. Here’s the key point: Everybody has different desires when it comes to retirement. I’m happy to hear what worked for the Quinn household. I’m less thrilled to be told repeatedly that what worked for the Quinn household is what I and everybody else should do. If a whole bunch of people say again and again that they’re comfortably retired on far less than 100% of their old salary, wouldn’t it be time to recognize that perhaps that’s actually true–and not to keep insisting that 100% income replacement is right for everybody?
I just say it’s a desirable goal with the benefit of adding a cushion to security.
i wonder where the people who think I’m crazy will be in 15-20 years after retirement and how much they may have compromised on life style
78% of Americans claim they live paycheck to paycheck. Hard to see how retirement will be much better and the average American isn’t saving 10% let alone 35-40%
My opinion should simply be ignored as people seem comfortable in their world and I hope that is always true.
It is difficult to ignore you when you feel the need to repeatedly state the same views in other writers’ comments sections, especially when you can’t resist using bold letters and caps. While you have many good ideas, I think your use of bold letters and caps in response to Sundar’s article detracts from other’s enjoyment of his article and borders on being disrespectful.
It is not a desirable goal if it is unnecessary, and results in continuing to work when you could be doing something you enjoy more while you are still healthy.
FYI, I will have been retired for 24 years come October. If I had been shooting for 100% I might still be working…. (Or not, I’d probably have been let go ten years ago as too old.)
Exactly. Thank you Jonathan for saying what I wanted to!