5 Common Risks in Retirement

By Chris Duderstadt

February 15, 2024

5 Common Risks in Retirement

Key Points – 5 Common Risks in Retirement

  • Do You Know What Tax Planning Opportunities Are Available to You?
  • How to Plan for Inflation
  • Your Health Is Your Wealth
  • Risks Associated with Living a Long or Short Life
  • 8 Minutes to Read | 24 Minutes to Watch

5 Common Risks in Retirement

Whether you’re in retirement or preparing for it, what your biggest fear when it comes to retirement? For most people, it’s running out of money. We’re going to discuss that fear—which is very legitimate—and how to plan for it. But that’s far from the only risk in retirement. Let’s review five common risks in retirement and what you can do to mitigate them.

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No. 5 Risk in Retirement: Tax Risk

We’ll kick off our list of five common risks in retirement by discussing tax risk. While it’s very deserving of a spot on this list, we believe tax risk is an avoidable risk in retirement if you build a forward-looking tax plan. But it’s important to understand that tax planning isn’t tax preparation.

Tax Planning ≠ Tax Prep

As long as you live in the United States and have money or make money, taxes will be a fact of your life. Once you understand that, think about what your taxes will be over your lifetime and try to predict what those taxes will look like in future years. Then, you manage around that.

If you do it properly, you can drastically reduce the amount of taxes you pay over a lifetime. The problem that so many people have, though, is that they get caught up in trying to pay as little tax as possible each year.

We always talk about the absolute need for retirees to have a financial plan. But if you don’t have a forward-looking tax plan associated with that, you won’t have a complete plan.

Obviously, the one retirement risk that you can’t avoid when it comes to taxes is what the government will do. Again, taxes are going to be a fact of life, but there are tax mitigation strategies that can help prevent the possibility of running out of money in retirement. Download our Tax Reduction Strategies guide below to learn more about what tax planning opportunities could be available to you.

Tax Filing Errors

Tax Reduction Strategies

No. 4 Risk in Retirement: Inflation Risk

Next up on our list of common risks in retirement risks is inflation risk. Just like with battling tax risk, you need to make sure to create a financial plan to effectively mitigate inflation risk. Your financial plan should apply different inflation rates to different expenses that you have.

Mortgages and Inflation

If you’re carrying a mortgage into retirement, there’s no inflation on that mortgage payment. It’s going to stay the same until it ends. It’s got a finite period. What could inflate, though, is property taxes on that. So what are you going to assume that the property taxes are going to increase by?

Consumer Good Inflation

What about your food, clothing, or electronics? You need to think through what you’re spending in your budget. Itemize those things out to apply different inflation rates to the various aspects of your spending. Typically, we’ll apply a 4% inflation rate to the cost of many of those everyday necessities.

Health Care Inflation

However, health care deserves an entirely different inflation rate! Between January 2020 and July 2023, health care costs inflated by 114.3% according to the Peterson-KFF Health System Tracker.1 Over that same period, consumer goods and services inflated by 80.8%. That’s why we apply a 6.5% to 7% inflation rate to our health care costs compared to 4% for consumer goods.

One of the Biggest Problems with Retirement Planning Calculators

When our advisors meet with people who have already started building a financial plan, one item that is frequently overlooked is inflation. And for many of those who have factored in inflation, they’ve just used a retirement planning calculator and applied one inflation rate across their entire plan.

That could have been extremely problematic if someone only applied a 1% or even a 2% inflation rate to their inflation plan. We saw a lot of people doing that when inflation was 2.5% or lower in 2019 and 2020, but it’s been substantially nearly each month since then.2 That’s why we take a conservative approach when applying inflation to someone’s financial plan. Then, when inflation isn’t there, they’ll just have more money to spend or pass on to the next generation.

No. 3 Risk in Retirement: Health Care Risk

Number three on our list of common retirement risks is health care risk. Obviously, a couple ways to potentially mitigate health care risk include eating healthy, exercising, and going to the doctor for check-ups. Taking care of yourself is critical with mitigating health care risk in retirement.

What we really want to touch on here, though, is health care and long-term care, as they are major risks in retirement. When it comes to health insurance and retirement, many people wait until they’re 65 because that’s when you become eligible for Medicare.

If you enjoy your job and want to work until 65, that’s great. But if waiting to become eligible for Medicare is all that’s keeping you from retirement, have you considered pre-Medicare options for health insurance? Yes, it’s a big expense, but if your financial plan still has a high probability of success when you factor it in, why keep working? Retirement planning is loaded with trade-offs. Whether to wait until 65 to retire to get on Medicare or retiring before that is a prime example of that.

Long-Term Care Risk

We also want to talk about long-term care risk. Long-term care risk is not for the individual that is in the long-term care facility. The risk is really for the surviving spouse. You need to consider the possibility that one spouse or the other could spend a significant amount of time in a long-term care facility.

If that occurs, the healthy spouse is likely going to be the one dealing with that expense. The rising cost of long-term care doesn’t take long to eat into a good plan. That’s why it’s so important to plan for health care costs in retirement.

No. 2 Risk in Retirement: Dying Too Soon

Another risk in retirement is dying too soon. You might say, “Well, how is that a retirement risk? If I’m dead, what’s the risk?” If you’re married, think about the impact—both emotionally and financially—that dying too soon has on your spouse.

If one spouse passes away, the smaller of the couple’s Social Security benefits will go away. Can the surviving spouse get by without that? And if you and/or your spouse has a pension, what precautions have you taken to make sure that if the person who is getting the pension passes away, what is the survivor benefit? Is it half? Is it a whole benefit? That’s where some real advanced planning comes in.

The Problem with Pensions

The problem with pensions is if one spouse passes away, a lot of times the surviving spouse is stuck with that lower benefit for the rest of their life. Some pensions will have a spring-back provision that allows that benefit to pop back up, but not all of them are that way.

Tax Ramifications

Let’s circle back to taxes really quick and discuss the tax ramifications for dying too soon. When you’re a single taxpayer, you hit those higher tax rates at lower income levels, so the tax risk can come right back in if you haven’t planned for it if one of the spouses passes away.

No. 1 Risk in Retirement: Running Out of Money

When people think the number one risk in retirement, it’s always running out of money. And you can run out of money in a lot of different ways—some of which we’ve already discussed.

Are You Fully Covered?

Another way is not to have proper insurance, and that doesn’t just include health insurance that we mentioned earlier. When’s the last time you reviewed your property-casualty insurance? Have you considered carrying life insurance into retirement? And, of course, homeowner’s insurance, car insurance, disability insurance, long-term care insurance—the list can go on and on—are also critical.

No one wants to buy insurance or file a claim, but it sure beats the alternative of catastrophic loss and potentially running out of money in retirement. The main thing to look at when you’re reviewing insurance is your liability limits and to make sure that you are fully covered. Risk management is the foundation of a solid financial plan.

Longevity Risk

When it comes to the risk of running out of money in retirement, it oftentimes ties right in with longevity risk. That’s the risk of living too long. Our advisors have had many people come to them with plans that had just their life expectancy based on the Period Life Table.3 But so many of them have ended up living well beyond that average life expectancy. If we had planned for their resources to last only until that average life expectancy, those people would be living on nothing but Social Security today. And that wouldn’t be a good thing.

When we build financial plans for people, we ask them how long their parents and other family members lived. And then we take a conservative approach—oftentimes using a life expectancy in the lower 90s—so that they’re mitigating that longevity risk.

Budget Appropriately

Every one of the common risks that we’ve discussed can lead to someone running out of money if they aren’t addressed. But all of them can be addressed. When someone starts to run out of money in retirement, one of the common issues that they have is not having a budget.

Based on your resources, is your budget fair? Could you spend more than what your budget is? Or do you need to make some sacrifices or concessions on some of the things that you wanted to do in retirement?

Lay all that out there. Then when any unforeseen events come at you, such as a prolonged market downturn, high inflation, or potential loss of a job or income. Again, those are examples of things that you need to stress test for when building your financial plan.

Building a budget—or as well like to call it, a spending plan—and stress testing are referenced throughout our Retirement Plan Checklist. Our Retirement Plan Checklist takes you through 30 yes-or-no questions that gauge your retirement readiness and includes age-and date-based timelines that note several critical retirement considerations. You can download your copy below.

Money Mistakes

Retirement Plan Checklist

Working with a Financial Planning Team

As you can see, there are a lot of retirement risks to plan for. It’s simply too much to ask of yourself or one financial advisor to build a personalized financial plan that accounts for all the various retirement risks. That’s why we have a team of professionals which consists of CFP® Professionals, CPAs, CFAs, estate planning specialists, and insurance specialists to cover all the pillars of financial planning.

If you have any questions about the common risks in retirement that we’ve discussed and how our team approaches them, start a conversation with our team below.

Schedule a Meeting

It’s critical to have a fluid financial plan in place that addresses all these potential risks. We’re ready to build you a plan that can help give you more confidence that you’re doing the right things with your money, freedom from financial stress, and time to spend doing the things you love.

5 Common Risks in Retirement | Watch Guide

00:00 – Introduction
00:59 – 5. Tax Risk
2:00 – Taxes in Retirement vs. Taxes in Your Working Years
– Looking at a Long-Term Tax Plan
6:04 – Required Minimum Distribution Age
7:02 – 4. Inflation Risk
– Property Taxes
8:29 – Reviewing Property-Casualty Insurance
10:52 – A Broader Look at Inflation
– Budgeting for Inflation in Retirement
14:28 – 3. Health Care Risk
15:02 – Understanding Health Care Costs in Retirement
15:58 – 2. Dying Too Soon Is a Risk in Retirement?
16:08 – Social Security and Pension Decisions
17:28 – Circling Back to Tax Planning
19:40 – 1. The Risk of Running Out of Money in Retirement
20:55 – Hedging Against Risks and Unknowns
– What We Learned Today


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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.