Post-Retirement Risk Definition

What Is Post-Retirement Risk?

The term post-retirement risk refers to any and all of the potential risks to financial security that an individual may encounter after retiring. Post-retirement risks result in unexpected costs or lower-income, either of which can jeopardize even the best-laid retirement plans. Some of the most common post-retirement risks include the death of a spouse, an unexpected illness, economic factors, and even changes to public policy.

Key Takeaways

  • Post-retirement risk is a potential risk to the financial security an individual may encounter after retiring.
  • These risks can result in unexpected costs or lower income—both of which can jeopardize even the best-laid retirement plans.
  • The Society of Actuaries conducts a biannual survey of retirement risks, measuring pre-retirees' and retirees' concern about and preparedness for risks related to the economy, lifestyle changes, and unexpected events.
  • Common post-retirement risks include the death of a spouse, an unexpected illness, economic factors, and even changes to public policy.
  • The best time to discuss your retirement with a retirement professional is now.

Understanding Post-Retirement Risk

Most people often think about retirement planning and how they'll achieve their goals. This usually entails deciding when to retire, whether to continue working part-time post-retirement, how much income will be required, and what kind of assets are needed to help achieve these goals.

Some people use the services of a financial advisor or financial planner to plan for retirement. But few people consider or discuss the risks they may face after retirement.

Many of these risks tend to be the same when you're working and after you've retired. But because of the limited amount of income you may earn post-retirement, it's a good idea to consider and review how your retirement savings could be affected by these risks.

After all, there's no real way to tell how long anyone will live, but these days, it's safe to assume that most people will spend 20 to 30 years in retirement. And with people living longer and more people retiring earlier, there's a good chance that many of us will spend more time in retirement than in the labor force.

Considering Post-Retirement Risk

Factoring in post-retirement risks can help people be better prepared for living comfortably after they stop working. Without proper planning for the risks, that nest egg may shrink.

Retirees should not plan on retiring on Social Security payments alone in today's uncertain environment.

The Society of Actuaries has a comprehensive list of post-retirement risks and conducts regular surveys about the risks people face when they retire. The most recent survey, conducted in 2021, involved people between 45 and 80. It evaluated the concerns people had about retirement and their preparedness, along with other factors such as their financial health and wellness, plans for housing, and opinions on long-term care.

In this survey, the top three risk concerns remained the same as they had in prior years: they included concerns about savings, not keeping up with inflation, and the ability to afford health and long-term care expenses.

Types of Post-Retirement Risk

The following is a list of some of the post-retirement risks recognized by the Society of Actuaries, which we have grouped into four different categories: personal and family, health care and housing, financial, and public policy.

Personal and Family Risks

These risks tend to affect the personal lives of retirees. Some of the most common risks that fall into this category include:

  • Death, Losing a spouse can reduce pension benefits or may add to the retiree's financial burdens, especially if there are medical bills or other debts that need to be paid.
  • Risks related to longevity or outliving your assets. The longer people live, the more money they'll need. Retirement income can only last a certain length of time, so the longer you live, the less money you'll have in your nest egg.
  • Change in marital status. Separation or divorce can significantly reduce your retirement income as there's a good chance you'll have to split your pot.
  • Financial assistance to family members. There may come a time when your children or other dependents may need some financial help, and they may turn to you. If you choose to help them out, you can expect to see a drop in your finances.

Health Care and Housing

These risks can be for either the retiree, their spouse, or their family members.

  • Unexpected Health Care Bills: An average retired couple age 65 in 2021 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate. Some American seniors may find it difficult to pay their health insurance premiums because of their limited income.
  • Housing Changes: Retirees may need to give up their current living situation and downsize or, in the case of health-related issues, may need to live in a care facility. Depending on the situation, this can impact a person's retirement savings.

Now let's consider the cost of health insurance for retirees. Medicare Part B premium is $164.90 per month in 2023. This means you'll pay $1,978.80 in premiums for the entire year. The annual deductible is $226, after which you'll typically pay 20% of all Medicare Part B-approved expenses. The Medicare Part A deductible is $1,600 in 2023. Part A pays for inpatient hospital stays and nursing care. Most people don't pay a monthly premium for Part A since they paid taxes during their working years.

Financial Risks

Financial risks to post-retirement generally involve issues like:

  • Inflation: The pace of rising prices can reduce a retiree's purchasing power over time. If a retirement fund has $100,000, but it is all cash, over a few years the purchasing power of that amount will be lower. Unfortunately, inflation compounds. Most financial advisors can help point retirees towards inflation products that keep up with rising inflation.
  • Interest Rates: The growth of a person's retirement fund depends, in part, on the way interest rates move. While low-interest-rate environments may be great for those looking to borrow, they aren't so good for people who are looking to save. Banks and other financial institutions usually pay low returns for investments when interest rates are low.
  • Stock Market Risks: Stock market performance can drastically affect your retirement portfolio. Although stocks tend to outperform other investments, losses can reduce investment value. It is for this reason that many retirement portfolios are designed to be lower risk, and will carry a substantial amount of the principal in securities that are less volatile than individual stocks or stock market index funds.

Public Policy

The possibility always exists that taxes, Social Security, Medicare benefits, Medicare premiums, and other benefits will be changed. Since most current and future retirees will depend on these benefits to secure their retirement, the risk of changes in these programs is major, as the changes may adversely affect retirement security.

How to Prepare for Post-Retirement Risk

Mitigating post-retirement risk is all about planning. There are things you can do that have no direct effect on your retirement savings that could have a substantial impact on the quality of retirement. A common example would be, if you are able, staying in good physical shape.

On a financial level, the single best preparation would be working with a financial advisor that you trust. They will be able to not only give informed investment advice but will understand the details regarding Social Security, annuities, life insurance, and other items. These professionals are able to see the whole picture without emotion, which too often clouds retirement decisions.

If you manage your own investments, it is common to scale down risk as you approach retirement age. Instead of investing in value stocks that are volatile, consider investing in inflation-protected securities. Making a real estate gamble might be volatile, and not as wise as perhaps using the money and investing in bonds or other stable securities.

Preparing for retirement and working to keep risk low is a very individual undertaking, and no two people will have the same plan. It is for this reason that working with a retirement professional is highly recommended.

What Are the Most Common Risks in Retirement?

The most common risks in retirement are personal risks, health risks, financial risks, changes in public policy, loss of housing, and others. Two of the more common issues are outliving savings, and losing purchasing power due to inflation.

What Are Some Ways to Manage Risks in Retirement?

Managing risk in retirement is mostly about planning before you reach retirement age. This can include making investment adjustments to lower risk, downsizing housing or lifestyle if needed, investing in inflation-protected securities, and others. Each situation is unique and requires a "top-down" view by a retirement professional.

What Is the Retirement Risk Zone?

The retirement risk zone is a period about five years before retirement and five years after retiring, when a retirement portfolio is most susceptible to market downturns. A loss in a portfolio's value during this time could have long-term effects on your ability to comfortably retire.

Is Social Security Alone Enough to Retire on?

Although this is largely dependent on where you live and your lifestyle, it can generally be said that it is very difficult to retire on Social Security alone. However, if you have an expensive lifestyle in an expensive state, it could be possible to retire on only Social Security if you move to a cheaper city or, as some retirees are discovering, a different country altogether. You may be able to live with a very high quality of life on Social Security alone.

The Bottom Line

Post-retirement risk is a growing concern as talks of Social Security availability mount and average lifespans increase. There is no one-size-fits-all approach to retirement planning and requires a retirement professional to work over all available options regarding your specific situation. There is never too early of a time to start discussing retirement strategies with a professional, even if it can be a stressful and anxious first step.

Article Sources
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  1. Society of Actuaries. "2021 Risks and Process of Retirement Survey."

  2. Society of Actuaries. "2021 Retirement Risk Survey."

  3. Society of Actuaries. "2021 Retirement Risk Survey," Page 13.

  4. Fidelity. "How to Plan for Rising Health Care Costs."

  5. Centers for Medicare & Medicaid Services. "2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts."

  6. Centers for Medicare and Medicaid Services. "Medicare Costs at a Glance."

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