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What Risks Might You Face in Retirement?

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What Risks Might You Face in Retirement?

When you are young and healthy, you might not worry about the risks that people face in retirement. However, it is a good idea to at least know what they are so that you can plan ahead to anticipate and manage them. Here are some of the common risks:

Longevity risk

Longevity risk is the risk of having to pay big costs due to living longer than expected. These days, many of us can expect to live—and pay for—20 or more years beyond the traditional retirement age of 65. The risks may include big medical bills, a lower standard of living, and having to give up some important things in life just to save money.

Things To Know

  • With some planning and many years of investing, you can manage these risks fairly well.

To manage longevity risk, some retirees will buy an annuity from an insurance company, which can provide an income stream for the rest of their lives. Other options include taking a part-time job or budgeting well—or both.

Healthcare costs risk

Healthcare costs risk is the risk that you will face unmanageable out-of-pocket health care costs in retirement—as well as various forms of disability. This is undoubtedly among the greatest of many people’s fears in retirement planning. Advances in life expectancy are exposing more and more of us to this risk.

To manage healthcare costs risk, it is important to have adequate insurance. Many people also open up health savings accounts. These accounts allow individuals covered only by high-deductible health plans to save money for medical expenses while not having to pay taxes on the money. Once you are retired, you will likely be covered by Medicare, but it does not cover all costs. That’s why many people also buy Medigap supplemental insurance.

Long-term care risk

Long-term care risk is the risk of losing the ability to live independently, and the cost of necessary care for it. As people grow older, they are more likely to need help with eating, bathing, moving, housework, and other actions that we take for granted. Long-term care can drain a family of all of its money.

To manage long-term care risk, you can pay all the costs yourself, you can buy long-term care insurance, or you can impoverish yourself to qualify for Medicaid (government assistance).

Inflation risk

You have seen how prices rise over time and take out more of your paycheck every year. Inflation risk is the risk that rising prices will eat into your money’s purchasing power. For many of us, the loss of purchasing power can mean hard choices regarding the necessities of life, such as food, medical care, gasoline, and home heating. Retired people are hit especially hard because they usually live on fixed income.

Inflation risk can be managed in several ways, including decreasing your living expenses, changing your income streams, or changing your investments. But the sooner inflation risk is taken into account, the more flexibility you will have in preparing for it. Good retirement planning requires taking inflation into account. It involves putting your money into growth investments such as certain stocks and mutual funds long before you actually retire.

Investment risk

Investment risk is the risk that your investments will not perform as well as expected. Whether your money is in stocks, bonds, or CDs, there will be some investment risk. If your investments perform poorly, you might be unable to pay for the things you need in retirement. Investment risk can’t be eliminated. But it can be managed.

One way to manage investment risk is to diversify your investments among several kinds. CDs, bonds, and savings accounts have low risk but also provide low income. Stocks and mutual funds can be low risk or high risk. The ones with high risk have a higher earning potential, however, and many people accept their risk in an attempt to grow their money over the long term.

Final note

Retirement risks have a lot of doom and gloom in them. But with some planning and many years of investing, you can manage these risks fairly well. It’s not guaranteed—nothing really is—but the more you do and the earlier you start, the better your odds of success will be.