Navigating the hidden risks of retirement

Tyler Kert
Tamarack Wealth Management

Retirement marks a significant milestone in life. It represents the culmination of years of hard work and diligent saving. However, as retirees transition from earning a paycheck to relying on savings and investments for income, they face a new set of financial risks that can threaten their financial security. The risk that seemingly every retiree focuses on is market volatility. Many act like it is the only risk they have to face on a regular basis while they are retired. However, there are several other risks that retirees need to address. Being too focused on the risk of being invested in the market can lead to decisions that leave individuals exposed to other serious risks. This article will outline some of the common risks that retirees face but often don’t consider. Effectively managing these risks is crucial to maintaining a secure financial future. 

Market Volatility Risk:

As mentioned before, market volatility is one of the most “worried about” risks in retirement. The risk of market volatility threatens to erode investment portfolios and jeopardize long-term financial plans. To mitigate this risk, retirees should maintain a diversified investment portfolio that aligns with their time frame. If the time frame is shorter (five years or less), retirees might consider allocating a portion of assets to less volatile investments such as bonds and cash equivalents to cushion against market downturns. Another strategy to reduce market volatility risk involves the timing of withdrawals. Rather than trying to time the market and sell when investments are up, retirees should consider withdrawing on a regular schedule. Implementing a systematic withdrawal strategy can provide a steady stream of income while minimizing the impact of market fluctuations on investments. 

Longevity Risk:

As life expectancy increases, an increasing number of retirees face the risk of outliving their savings. Longevity risk is one of the reasons that retirement is difficult to plan for. No one knows when they are going to die and therefore it is important to have investments in place that won’t be depleted if you live into your 90s or later. To address longevity risk, there are several options retirees should consider that have the potential to mitigate this risk entirely. A pension is one lifetime income solution that can solve the problem of longevity risk. Unfortunately, pensions are getting fewer and further between. Many people don’t realize that you can buy a pension. Annuities provide guaranteed income streams for life, just like a pension, and can be “bought” through investing in them. They aren’t suitable in every situation, but they should be considered if a retiree is looking for income and financial security regardless of how long they live. Annuities are also tax deferred and can be used to defer taxable income into later years as needed. Investing in real estate either directly or indirectly can provide protection against longevity risk through rental income. Renters will always need a place to live. While renting property comes with its own set of risks, the steady stream of rent payments can be valuable to retirees looking for lifetime income.

Inflation Risk:

Inflation erodes purchasing power over time. Many retirees are exposed to inflation risk when they overreact to market volatility risk. Periods of market downturn can cause retirees to panic and move their investments into cash. What they don’t realize is that in reality, they have only traded one risk for another. For retirees that can’t stand the market, Treasury Inflation-Protected Securities (TIPS) or inflation-indexed annuities might be a good option. These investments adjust returns based on changes in the Consumer Price Index (CPI) to keep pace with inflation. Inflation adjusted options aside, regularly rebalancing the investment portfolio is one of the surest ways to maintain an appropriate mix of assets and outpace inflation. 

In conclusion, retirement planning involves many different financial risks, each posing unique challenges to retirees. Many retirees will say, “I just don’t want to take any risk.” Unfortunately, it is impossible to avoid every risk. You can avoid market risk by moving all of your money to cash. But, in doing so, you will be exposing yourself to inflation risk as your purchasing power starts to erode. In addition, longevity risk increases exponentially when retirees aren’t invested in the market because their retirement accounts aren’t growing. These risks reinforce the importance of establishing a financial plan that addresses and mitigates the risks involved. A well thought out retirement plan tailored to individual needs and circumstances is the cornerstone of a successful retirement.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.