Key takeaways

  • It’s critical to reduce financial risks in retirement because you have less time to recover
  • There are three main financial risks in retirement: outliving your money, stock market losses, inflation
  • A well-balanced retirement portfolio including stocks, bonds, and cash can help reduce your financial risk

Once you retire and are no longer earning a paycheck, you're counting on your investments to sustain you. Making the right decisions now will help you enjoy your well-earned retirement. Though this next life chapter might seem like a finish line, statistics tell us you'll be retired for roughly 20-30 years, so it's actually the beginning of the next phase of your financial life.

Retirement risks to watch out for

Enjoying your retirement means having a plan that reduces potential risks, whether those risks involve aging, shifts in the stock market, or even broader economic changes. Let’s look at three common risks:

  • Longevity risk, which is another way of saying “outliving your money,” is something many retirees worry about. This is one of the main reasons why you should build a solid, balanced portfolio now.
  • Market risk, which consists of the possibility of the stock market dropping dramatically, can make financial planning challenging. This is especially true if the market drops early in your retirement years. A strong financial plan accounts for market risk throughout your life, because this risk is inevitable.
  • Inflation risk essentially deals with the value of your money. If inflation averages 3.1% a year, for example, $1 today will only be worth 73 cents in 10 years, or 54 cents in 20 years. It's important, then, to factor in changes to the value of your savings when planning for the future.

Reducing risk

There are a lot of ways to handle these risks, and here are just a few of them:

  • Cash, whether in the form of a savings account, money market account, or CD, provides the same benefit in retirement as it does before retirement: a highly liquid asset that can be used for current expenses.
  • Stocks add the potential of growth to your portfolio, but can carry some risk. Some stocks also share the company’s profits with you via quarterly payments, called dividends.
  • Bonds are a key part of your retirement plan because they provide income, stability, and help your money react to the market differently. During a significant stock market downturn, for example, bonds may rise or fall only slightly. Conversely, when the stock market is roaring, bonds might lag behind. That’s okay. You want the assets in your portfolio to help balance each other, regardless of how the overall market is moving.
  • Social Security was designed to supplement your other income sources in retirement, not fund your entire post-work life. As of May 2021, the average Social Security retirement benefit was about $1,543 a month, or about $18,516 a year. Even folks who earn six figures and are collecting the maximum Social Security benefit ($3,895/month in 2021) need more than Social Security to support themselves, so make sure to focus mostly on cash, stocks, and bonds.

You've worked hard for your retirement, and you deserve to enjoy it. Make sure you reduce your financial risks in retirement by building and managing a well balanced portfolio.

If you need help doing that, consider talking to a CFP® Professional at Facet.