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Top 8 Financial Risks You Face in Retirement

Category: Financial and taxes in retirement

September 10, 2012 — With all the discussion going on about the poor state of most retirees’ financial preparation for retirement, it seems like this might be a good opportunity to talk about financial risks in retirement. While we are not financial professionals, we have surveyed the literature to prepare this list for your consideration. While you probably are aware all of these risks, it is always worth considering how they might apply to you one more time.

Data from the Federal Reserve’s 2010 Survey of Consumer Finances found that the typical U.S. household between ages 55 and 64 held just over $45,000 in their tax-exempt retirement plans in 2004. In 2010, after the biggest financial crisis in U.S. history, these plans held only $42,000 (this figure is for all Americans, including folks not in an employer-sponsored savings program). Households headed by a baby boomer age 60 to 62 with a 401(k) plan was more – $149,400 – but not even twice their median annual income of $87,700, according to Boston College’s Center for Retirement Research.

The Big One
The chief financial problem in retirement stems from the fact that you are probably not working any more. Therefore you are relying on what you have saved, or the promises you have earned in the form of a pension or social security benefit. If something goes wrong with the plan, you can’t recover – unless you go back to work (sometimes not possible, usually not desirable).

1. You Outlive Your Money
People are living longer and longer – in fact if you are a female alive at 65 your new life expectancy is 85; you have a 30% chance of living until at least 90. If you are fortunate enough to live a long time, your nest egg might not survive withdrawals over a longer period of time than you planned for. And, if you take out money faster than you should because of emergencies or lack of discipline, the problem gets even worse.

2. You Lose Money on Your Investments
The investment crash and recession that began in 2007 really whacked millions of people’s investment portfolios. Just about everyone’s investments went down significantly, although they have mostly recovered since. But, if you sold everything at the bottom of the market, the money is gone. Anything can happen in the future.

3. You Are Not Adequately Diversified
There is all kind of financial diversity to consider. For example, does one advisor manage all your money? Are you properly balanced between equities, bonds, and cash for your age and risk desire? Is your portfolio concentrated on just a few individual stocks, or could you add more stocks or diversify into mutual funds? All of these risk factors could hurt you. If it looks like you are not diversified, talk to an advisor about how to remedy that.

4. You Don’t Consider the Best Time to Take Social Security
The decision as to when to claim is complex and individual, depending a lot on your life expectancy and how much you need the money. In general, waiting until age 66, or even 70, is the smart move. Remember that your decision doesn’t just affect the higher earning spouse. The surviving spouse’s income for the remainder of his or her life is affected by your decision.

5. Inflation.
Sure, your Social Security benefits are indexed against the cost of living. But how about your other investments? If inflation gets higher and your investments do not keep up, you could face a declining standard of living.

6. Health Care Expenses
This could be the single biggest risk you face, particularly if a health issue affects you before you become eligible for Medicare at 65 and do not have good health insurance. A catastrophic medical event at any age could mean significant medical expenses, including drugs that are not covered by any insurance, including Medicare. And if are forced to enter a nursing or rehab facility the un-reimbursed expenses could be staggering (as could home health care aides). Expect to pay $74,000 a year for nursing home care, depending on where you live. You generally must exhaust all your family assets before Medicaid will start paying for nursing care.

7. Death of a Spouse
While the surviving spouse will continue to receive the higher earner’s Social Security benefit for the rest of their life, he or she will lose the spousal benefit (50%) they were probably receiving (the same might apply to a company pension). Also, the deceased spouse might have had a part time job, or they might have been providing care for the other spouse that now must be paid for. Many surviving spouses are forced into poverty.

8. Your Dependents
There are other risks as well. Your dependents could be forced to rely on you for financial support. In fact, they might have to move in with you. Either event could be devastating to your finances.

For further reference:
Big Income Losses for Those Nearing Retirement
SCF finds 2010 shows alarming drop in wealth to income ratio
Unexpected Expenses in Retirement
Retirement Costs Confuse Retirees

Making Your Retirement Assets Last

The authors used a helpful backgrounder from the Oakley Wing Group at Morgan Stanley Smith Barney in Essex, CT as a major reference this article. Their asset management team is available to help clients learn more about the preparations necessary to make a financially sound transition into retirement. Call or email 860-447-4847 or Here is a link to the backgrounder on Retirement Risk Review

Your Comments. What do you think are the biggest financial risks you face? Or, what risks have already affected you? Please let us know in the Comments section below.

Posted by John Brady on September 10th, 2012


  1. An important list. If your home is your retirement plan, that would be another major financial risk you face in retirement.

    Jan Cullinane
    AARP’s The Single Woman’s Guide to Retirement
    The New Retirement: The Ultimate Guide to the Rest of Your Life

    by Jan Cullinane — September 11, 2012

  2. Your list seems to assume that in a couple, only one earned enough to qualify for Social Security. Thus the other is getting a spousal benefit.

    In fact as I understand it, in a 2-career household you get two full Social Security checks until one of you dies. Then you could see your income cut almost in half. It’s great to have the extra checks, but the financial consequences are more severe for a surviving spouse.

    by Flora — September 12, 2012

  3. In Florida, home insurance. Because many companies – Allstate, Nationwide, Travelers, etc. – are cancelling homeowners’ policies, Florida residents are being forced into Citizens Insurance, the state-run last-resort insurance source. But “re-inspections” are jacking up premiums. Google “Lawsuits against Citizens Insurance.” For example:
    ‘Angry’ Tequesta homeowner files suit against Citizens contractor
    Suit alleges Mueller Services wrongly denied insurance credits
    By Charles Elmore Palm Beach Post Staff Writer

    A Tequesta homeowner who said her insurance premium nearly doubled after a reinspection for storm-resistant credits filed suit today in federal court against Mueller Services, a contractor working for Citizens Property Insurance Corp.
    The suit marks at least the second seeking class-action status in connection with the massive reinspection program, which affects more than 250,000 customers of Florida’s last-resort insurer. Citizens is Florida’s largest property insurer with 1.4 million customers including 140,000 in Palm Beach County.

    by OldNassau'67 — September 12, 2012

  4. Flora, Hopefully, you will both live a long, long time together. As a single person who just gets SSI based on my pay only, I think you should see it as you are getting an “almost double” benefit for awhile rather than having your income cut “almost in half” and plan based on that. Here is too a long life for BOTH of you.

    by Elaine — September 13, 2012

  5. The take away for me… the list of risks illustrates the importance of having a good financial plan well in advance of retirement. Not having a plan is perhaps the greatest risk of all.

    I suggest seeking the advice of a fee only financial planner. The fee only planner will not or should not try to sell you any financial product. Their job is to assess your situation and develop a plan that meets your needs based on your health, wealth, risk tolerance and time horizon. If you are fortunate enough to have retirement savings then; they should provide you with an all weather investment portfolio of stocks and bonds. They should teach you how to rebalanced and tax managed the portfolio or manage it for you.

    by Mr B — September 15, 2012

  6. Mr. B,
    You are right on target about using the services of a fee only financial planner. I would add they should be either a Certified Financial Planner or Chartered Financial Planner. Many insurance companies and banks have financial planners however they do not necessarily hold the above certifications.

    by Steve T — September 16, 2012

  7. Someone left a web site address that compaired cost of living between your present hometown and one you would like to move into, I lost the address could you please let me know what it is again it is a great site

    by Terry S — September 23, 2012

  8. Terry, there are a number of cost of living calculators. One is:
    If you aren’t happy with that one, put “cost of living calculator” into your browser, and you’ll see a number of them.

    Jan Cullinane
    AARP’s The Single Woman’s Guide to Retirement (John Wiley & Sons)
    The New Retirement: The Ultimate Guide to the Rest of Your Life (Rodale)

    by Jan Cullinane — September 24, 2012

  9. Thanks Jan I tried your suggestion with great success

    by Terry Simons — September 24, 2012

  10. […] further reference: New Retirees: Avoid These Mistakes Top 8 Financial Risks You Face in Retirement Unexpected Expenses in Retirement Social Security’s Retirement Benefit Estimator What You […]

    by » Quiz: Is This the Right Time for You to Retire? Topretirements — October 2, 2012

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