The Three Major Risks of Retirement: Longevity Risk, Investment Risk and Planning Risk

Retirement Is More Than Reaching a Number

Many retirement conversations begin with a number: How much have you saved? That number matters, but it does not tell the whole story.

A successful retirement also depends on how long your money may need to last, what happens when markets are unfavorable, and whether your overall plan can adapt as life changes.

A useful way to think about these challenges is to group them into three broad categories: longevity risk, investment risk and planning risk. These risks often overlap, which is why addressing only one of them can leave important gaps.

1. Longevity Risk: What If Retirement Lasts Longer Than Expected?

Longevity is good news, but financially it creates an unusual challenge: no one knows exactly how long retirement will last.

A person who retires in their mid-60s may need income for 20, 30 or even more years. A longer retirement means more years of ordinary living expenses and more time for inflation, healthcare costs and other unexpected expenses to affect the plan.

The objective is not to predict an exact lifespan. It is to build a plan that does not depend on everything happening according to an average.

Questions worth considering include:

• Which expenses must be covered every month regardless of market conditions?
• Which income sources are guaranteed, and which can fluctuate?
• How much flexibility exists if retirement lasts longer than expected?
• Would a surviving spouse have sufficient income if one spouse dies first?

Depending on the situation, Social Security claiming decisions, pensions, personal savings, insurance and guaranteed-income products may all play a role. No single tool is automatically the answer.

2. Investment Risk: What Happens When Markets Do Not Cooperate?

Investments can provide important long-term growth, but markets do not move in a straight line. Retirement changes the equation because a retiree may be withdrawing money while investments are declining.

That combination can be particularly difficult early in retirement. Selling investments during a significant downturn can reduce the amount of capital available to participate in a later recovery.

Investment risk is broader than stock-market volatility. It can include concentration risk, inflation risk, interest-rate risk and liquidity risk.

The goal is not necessarily to eliminate investment risk. Doing so could create another problem if assets fail to grow enough to keep pace with inflation. Instead, the objective is to understand which dollars may be needed soon, which can remain invested for longer-term growth, and how much volatility the household can realistically tolerate.

Investment allocation and securities advice should be handled by an appropriately licensed investment professional. Insurance planning can complement that work when protection or guaranteed-income needs are identified.

3. Planning Risk: The Risk People Often Overlook

Planning risk is what happens when the individual pieces of a retirement strategy are never coordinated.

A household may have Social Security, retirement accounts, savings, life insurance, Medicare coverage and perhaps a pension or annuity. Each component may be perfectly reasonable on its own, yet the overall plan can still have gaps.

Examples include:

• Retirement income that works for two spouses but changes dramatically after the first death.
• No clear strategy for a future long-term-care need.
• Beneficiary designations that have not been reviewed after major life changes.
• Insurance coverage that no longer matches the reason it was originally purchased.
• Too much money committed to illiquid solutions when accessible cash may be needed.
• A plan that has not been revisited for many years.

Planning risk is often less dramatic than a market decline, but it can be just as important because it affects how all of the other pieces work together.

How Do You Counter These Risks?

There is no universal retirement formula, but a sound process usually begins with four steps.

First, identify the risks that actually apply to your household. Second, determine which risks you can comfortably retain. Third, decide which risks may need to be reduced, transferred or insured. Finally, review the plan periodically because health, family circumstances, markets, tax rules and personal priorities can change.

The purpose of planning is not to eliminate uncertainty. That is impossible. The purpose is to understand the important risks and make deliberate decisions about them before they become urgent.

The Bottom Line

Retirement planning is not simply about accumulating the largest possible account balance. It is about converting the resources you have built into a strategy capable of supporting the life you want to live.

Longevity risk asks whether your resources can last. Investment risk asks how those resources may behave along the way. Planning risk asks whether all of the pieces actually work together.

Understanding those three risks is a strong place to begin.