Think of retirement planning like preparing for a cross-country road trip – there’s a lot to consider, and it’s often helpful to think about potential challenges before setting out on the journey. While everyone’s path looks different, understanding common financial speed bumps could help make the ride smoother. With factors like inflation and market volatility potentially affecting long-term plans, taking a closer look at what might impact your financial future could be worthwhile.
In this article, we’ll explore five key financial risks that could affect retirement plans. Whether retirement feels like it’s just around the corner or still years away, understanding these factors now might help you make more informed decisions about your financial future.
1. Longevity Risk: Outliving Your Money
Longevity risk is the “good problem” of living a very long life – longer than your savings can support. Thanks to medical advances and healthier lifestyles, people are living longer than ever. If you retire in your 60s, it’s not unreasonable to live 20, 30, even 35+ years in retirement. That means your nest egg might need to last longer than you initially thought.
Many retirees actually underestimate how long their retirement might be. For example, a 65-year-old today has about a 50% chance of living at least 20 more years to age 85. And about 1 in 4 will live past 90, while 1 in 10 will live past 95. In other words, there’s a decent chance you or your spouse could be retired for three decades or more. If you only plan financially for, say, 15-20 years of retirement, you could run out of money in your 80s with more life left to live.
Running out of money is one of the biggest fears for retirees. Imagine being 90 years old, still healthy, but realizing your savings are gone – not a pleasant situation. Longevity risk is about making sure a long life becomes a blessing, not a financial curse. The tricky part is you can’t know in advance if you’ll be the one who lives to 95. It’s like packing for a trip when you don’t know how many days you’ll be gone – better to pack extra socks just in case! In retirement planning, that means saving a bit more and planning for a longer horizon than the “average” life expectancy. After all, you don’t want to be average in this case – you want to be prepared for above-average longevity.
To combat longevity risk, plan beyond the average. Consider assuming you’ll live to 95 or 100 in your planning models – if you end up not living that long, you’ll leave a financial legacy to family or charity, but if you do live that long, you’ll be covered. The key is not to withdraw too much too soon – a common rule of thumb is the 4% rule (withdrawing around 4% of your portfolio in the first year of retirement, adjusted for inflation thereafter), though the right number can vary.
2. Inflation Risk: Rising Living Costs
Inflation risk is the danger that the cost of everything you buy will keep going up over time, eroding the purchasing power of your money. You’ve probably noticed prices creeping up over the years – for example, maybe your grocery bill or utility bills aren’t what they were a decade ago. Inflation is like a silent thief that makes your dollars less valuable over time. In retirement, this is crucial because you’re living on a fixed income or drawing from savings.
If inflation averages, say, 3% per year, that means that in 24 years, prices would roughly double (this is a rule-of-thumb known as the “Rule of 72”). In other words, $50,000 of expenses today could cost $100,000 per year in about two decades if inflation holds at 3%. And we’ve seen periods of even higher inflation – in 2021 and 2022, U.S. inflation spiked to about 7% and 6.5%, respectively, the highest in 40 years.If we ever had sustained high inflation like that, it could really throw a wrench in your retirement budget.
People often underestimate inflation because it tends to creep rather than leap (most of the time). But even “low” inflation can significantly raise your cost of living over a lengthy retirement. Think of inflation like termites in your house – slowly and quietly chewing away at the foundation. You might not notice the damage day by day, but over many years, it can be severe. If you retire at 65 and spend 20+ years in retirement, even modest inflation means you’ll need a lot more money in your later retirement years to buy the same things you buy today. Without planning for inflation, you might find that the comfortable income that covered your expenses at 65 is barely enough at 85.
The chart below shows U.S. annual inflation rates in recent years, illustrating how inflation can fluctuate. Notice the surge around 2021–2022 and the moderation by 2023–2024. This kind of volatility shows why you want to build a cushion for rising costs.
To address inflation risk, your retirement plan should include growth, even in retirement. This often means keeping a portion of your investments in assets that historically outpace inflation, such as stocks or real estate, for long-term growth while balancing them with more stable assets. It also means being realistic with your budget projections – build in an estimated inflation rate (for example, 2%–3% per year) when planning your future expenses. Many pensions and Social Security have cost-of-living adjustments (COLAs) – Social Security’s COLA was 8.7% for 2023 due to high inflation, which helps.
In short, don’t assume that a dollar today will cover a dollar’s worth of expenses in the future – plan for rising prices so you maintain the same standard of living throughout retirement.
3. Market Risk: Investment Volatility
Market risk is the chance that the investments you’re counting on (like stocks, bonds, mutual funds, etc.) will go down in value at the wrong time. We all know the markets can be a roller coaster – sometimes they’re up, sometimes down. In retirement, market downturns can be especially scary, because you might be drawing on those investments for income. When we say “volatility,” we just mean the ups and downs. For instance, if you have money in the stock market, its value can swing daily based on economic news, company earnings, interest rates, and even global events. Investment volatility is a normal part of investing, but it’s a risk to plan for, because a big market drop early in your retirement could shrink your portfolio.
Even a well-diversified portfolio will experience bumps. Market risk was on full display in the past few years: 2022 saw the S&P 500 stock index drop about 19%, while 2023 saw it bounce back by roughly 24%. Those are big swings! And historically, even bigger drops have happened (like the 2008 financial crisis when stocks fell by around 38%).
You can’t control the markets, but you can control how you prepare for and respond to market risk. First, set the right asset allocation – this means the mix of stocks, bonds, and cash in your portfolio. Generally, a well-diversified portfolio with a mix of asset types can help cushion the blows; when stocks go down, bonds often go up or hold steady (though 2022 was rough for both). You also want to adjust your risk level as you approach retirement – typically reducing stock exposure compared to when you were younger but not eliminating stocks entirely (since, as we discussed, you need growth to fight inflation and last a long time).
Second, have a rainy-day fund or cash cushion so you don’t have to sell investments at a bad time – if the market drops, you can use your cash reserve for living expenses for a year or two while waiting for a recovery.
Third, don’t panic. If you have a sound long-term plan, try not to let short-term market swings derail you. Historically, the market’s bad years have often been followed by good years, as the chart above shows.
4. Healthcare Cost Risk: Increasing Medical Expenses
Healthcare cost risk is the chance that medical expenses will rise sharply (and/or you’ll need expensive care) and eat into your retirement savings. As we age, it’s common to need more medical attention – prescriptions, treatments, maybe surgeries, or long-term care. Even if you’re healthy now, the cost of health care tends to increase as you get older, and healthcare costs, in general, have been rising faster than regular inflation.
In fact, one recent estimate found an average retired individual may need around $157,500 for out-of-pocket healthcare expenses in retirement, and a 65-year-old couple might need about $315,000 (out-of-pocket, not covered by Medicare) for healthcare over their retirement.
Those figures include things like Medicare premiums, co-pays, medications, and so on – and they can be even higher if you face chronic illnesses. Now, consider that healthcare costs have been rising faster than general inflation: since 2000, general consumer prices have risen about 86%, but medical care prices have jumped roughly 121% in the same period. That means healthcare in 2025 costs more than double what it did in 2000. This risk also includes long-term care costs – services like nursing homes or in-home care if you become unable to fully care for yourself. About 70% of 65-year-olds will need some form of long-term care in their lifetime, and those services are very expensive (a private room in a nursing home can easily cost over $90,000 per year).
Even with Medicare, which most Americans 65+ rely on, you can have significant out-of-pocket costs because Medicare doesn’t cover everything (for example, dental, vision, hearing aids, and long-term care are not fully covered, if at all). If you retire before 65, finding affordable health insurance is another challenge. And long-term care, which isn’t covered by Medicare, can quickly burn through savings if you need it for an extended period. Think of healthcare cost risk as a combination of predictable inflation (premiums and medical services getting more expensive each year) and unpredictable events (like a sudden illness or accident). Both aspects need to be planned for.
To handle healthcare cost risk, you need a two-pronged approach: living a healthy lifestyle and financial preparation. Staying healthy as long as possible can delay or reduce medical costs – exercise, diet, and regular checkups are your first line of defense. But since you can’t eliminate the risk entirely, plan financially for higher health expenses as you age.
5. Sequence of Returns Risk: Poor Returns Early in Retirement
Sequence of returns risk is a mouthful, but the concept is pretty straightforward. It’s the risk that the timing of investment returns – particularly getting bad returns early in your retirement – will negatively impact how long your money lasts. In other words, it’s not just how much your investments earn on average, but when they earn it. If the market has a downturn in the first few years after you retire, while you’re simultaneously withdrawing money from your portfolio, you’re selling investments at low values and reducing the base from which your portfolio can recover.
Even if the average return over your retirement is decent, those early losses can cause a permanent dent. Conversely, if the market does great in the early years of your retirement, your portfolio may grow so much that it can easily weather later downturns. This “luck of the draw” with timing is what we call sequence risk. It’s an often overlooked risk because when people hear “average 7% return,” they assume they’ll be fine – but order matters when you’re taking withdrawals.
The chart below shows a simplified but eye-opening example of sequence of returns risk. Both scenarios start with $1,500,000 in retirement savings and withdraw $75,000 per year to fund the dream—whether that’s beachside sangrias or just keeping the lights on.
Each portfolio earns the same average return over 6 years, but here’s the twist:
- Scenario A (“Early Losses”) takes a hit from the market in the first couple of years.
- Scenario B (“Later Losses”) enjoys the good times early and eats the downturn later.
Despite identical average returns, Scenario A ends up with a lot less money by Year 6. Why? Because early losses, combined with regular withdrawals, do long-term damage that’s hard to recover from. That’s sequence risk in action.
The Impact of Market Timing in Retirement
Same average return over time, very different results
What's happening here? Both scenarios:
- Start with the same $1,500,000 retirement portfolio
- Withdraw the same amount each year ($75,000)
- Experience the exact same returns over 6 years, just in different order
- Have the same average annual return of approximately 4%
The big difference: When those good and bad years occur. Early losses combined with withdrawals create a "hole" that's difficult to recover from.
| Year | Early Losses Return |
Early Losses Year-End Balance |
Later Losses Return |
Later Losses Year-End Balance |
|---|---|---|---|---|
| Start | - | $1,500,000 | - | $1,500,000 |
| 1 | -15% | $1,200,000 | +15% | $1,650,000 |
| 2 | -5% | $1,065,000 | +10% | $1,740,000 |
| 3 | +0% | $990,000 | +8% | $1,804,200 |
| 4 | +15% | $1,063,500 | -15% | $1,458,570 |
| 5 | +10% | $1,094,850 | -5% | $1,310,640 |
| 6 | +8% | $1,107,435 | +0% | $1,235,640 |
| RESULT | Same Avg | $1,107,435 | Same Avg | $1,235,640 |
| Difference: $128,205 (11.6% less money) despite the same average returns! | ||||
The bottom line: Early market losses, when paired with steady withdrawals, can shrink a portfolio faster than most people expect. We’ll dive deeper into smart strategies for managing this risk in future articles, but for now, the key takeaway is this: timing matters, and being aware of it is the first step toward protecting your retirement.
Conclusion: Plan Ahead and Secure Your Retirement
Retirement should be a time to enjoy life – travel, hobbies, family – not a time to constantly worry about money. By understanding and preparing for these five key risks, you’re helping to stack the odds in your favor for a financially secure and stress-free retirement. The common theme across all these risks is planning ahead.
If you’re reading this and feeling a bit unsure about whether your current plan covers all these bases, it might be a perfect time to get a professional second look. We invite you to schedule a free consultation with G&R Financial Solutions. Let’s have a conversation about your goals, concerns, and how to help ensure you can enjoy the retirement you’ve worked so hard for. We’ll help you assess each of these risks in your own situation and find smart ways to address them.
Sources:
- https://fedimpact.com/the-longevity-challenge-how-living-longer-will-impact-your-retirement/
- https://www.bankrate.com/investing/what-is-the-rule-of-72
- https://www.investopedia.com/inflation-rate-by-year-7253832
- https://www.macrotrends.net/2526/sp-500-historical-annual-returns
- https://www.healthsystemtracker.org/brief/how-does-medical-inflation-compare-to-inflation-in-the-rest-of-the-economy
