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.
- 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' list of post-retirement risks is grouped into four different categories: personal and family, health care and housing, financial, and public policy.
- Common post-retirement risks include the death of a spouse, an unexpected illness, economic factors, and even changes to public policy.
Understanding Post-Retirement Risk
Most people often think about planning for retirement 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.
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.
Factoring in post-retirement risks can help people be better prepared for living comfortably after they stop working.
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 2019, 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 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 Risks
The following is a list of some of the post-retirement risks recognized by the Society of Actuaries, which are 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: Medical costs during retirement are expected to be $295,000 on average for a couple both age 65 retiring in 2020, according to the Fidelity Retiree Health Care Cost Estimate. Premiums are a significant drain on the income of average American seniors. For example, Medicare Part B premiums are $148.50 for 2021, with the annual deductible amounting to $203.
- Changes in housing: 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.
Financial risks to post-retirement generally involve issues like:
- 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.
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.