Is Your Retirement Plan Missing These Important Protections?
When Sarah Mitchell started planning for retirement at 58, she felt confident about her strategy. She'd weathered the 2008 financial crisis, diversified her 401(k), and even built a six-month emergency fund. Like many pre-retirees, she focused on the obvious risks—market crashes, job loss, or major health expenses. What she didn't anticipate were other lesser-known risks lurking beneath the surface of her retirement plan.
The Retirement Iceberg: Risks You Can’t See
Think of retirement planning like navigating around an iceberg. What’s visible, such as market volatility, healthcare costs, and basic living expenses, gets most of our attention. But there are other less visible risks that can negatively affect many retirement plans. A 2024 Fidelity report explains that poor returns early in retirement hurt more than later ones because they reduce years of potential compounding.
Three commonly overlooked risks in retirement risk management? Sequence of returns risk, longevity risk, and inflation’s compounding effect. Addressing these early might mean the difference between comfort and financial strain in retirement.
What Is Sequence of Returns Risk?
This risk comes from when poor investment returns happen, not just how much they average over decades. The order in your retirement timeline matters.
Two retirees could each start with $1 million and see identical returns over 20 years, but if one suffers big losses in the first three years, their portfolio might run out much earlier than expected. Losses later in retirement? The impact is far smaller.
Early losses hurt because withdrawals during downturns may force you to sell more shares at low prices, leaving fewer to potentially rebound when markets recover.
Picture this: you retire in January, the market drops 20% by March, and you’re still paying for groceries, utilities, and healthcare. That double hit—shrinking investments plus ongoing withdrawals—is sequence of returns risk.
Longevity Risk: Outliving Your Money
Americans are living longer, but retirement planning hasn’t necessarily kept up. Based on historical returns, extending retirement by just 5 years could increase your risk of running out of money by as much as 41%, a risk that grows as lifespans increase, especially for healthy, high-income retirees.
Longevity risk isn’t just about living longer. It’s about the financial strain of those extra years:
- More years of portfolio withdrawals
- Additional healthcare expenses
- Increased exposure to inflation
- Higher probability of experiencing market downturns
The numbers are sobering: about 20% of U.S workers expect a 30+ year retirement, yet few plan to work longer. Even today’s pre-retirees face the challenge. A healthy 65-year-old couple has a 50% chance one spouse will live to 92, and a 25% chance one will reach 97. Planning for the “average” isn’t enough. You must prepare for a much longer retirement than expected.
Inflation and Retirement: The Silent Income Drain
Many retirees understand inflation, but they may not realize how the link between inflation and retirement can steadily erode their spending power. A large cost-of-living increase early in retirement raises your expenses permanently, even if inflation later drops.
Retirees face unique inflation pressures:
- Healthcare Costs: Older adults tend to spend disproportionately on healthcare, which historically inflates faster than the general economy. As of mid-2024, healthcare costs climbed about 3.3% annually, edging past the general inflation rate of roughly 3.0%.
- Fixed Income Limits:Unlike workers who may receive wage increases, retirees relying on savings, CDs, or fixed annuities have limited built-in inflation protection. Social Security benefits do include an annual COLA—2.5% for 2025—which helps offset inflation but may not fully cover rising costs.
- Low-Return Portfolios: More conservative portfolios that lean toward bonds and cash, as is generally typical of older adults, means that they have lower return potential and that means that inflation takes a bigger bite out of the return.
Example: If you retire with $50,000 in annual expenses and inflation averages just 3% yearly, you'll need $67,196 to maintain the same purchasing power after 10 years, and $90,306 after 20 years. That's nearly double your initial expenses.
Retirement Risk Management with the Right Planning Tools
The good news is that these risks are manageable with proper planning and the right financial tools. Here are some suggestions how to help you build defenses against each potential risk:
Combating Sequence of Returns Risk
Build a Cash Buffer: Maintain 1-2 years of expenses in high-yield savings accounts or short-term CDs. This buffer can help you to avoid selling investments during market downturns.
Create Flexible Withdrawal Strategies: Rather than fixed 4% withdrawals, consider dynamic strategies that adjust based on market performance. Reduce withdrawals during poor market years and increase them during strong performance periods.
Utilize Bond Ladders: Structure fixed-income investments to provide predictable income during your early retirement years, reducing reliance on volatile stock sales.
Addressing Longevity Risk
Plan for 95, Not 85: Build your retirement plan assuming you'll live to 95, even if family history suggests otherwise. It's better to leave money to heirs than to run out early.
Consider Longevity Strategies: Deferred income annuities that begin payments at age 80 or 85 can provide a floor of income for your later years.
Maintain Growth Investments: Even in retirement, allocate the appropriate percentage of your portfolio to stocks to seek growth potential over potentially two or three decades of retirement.
Fighting Inflation
Add Inflation-Protected Investments: Consider Treasury Inflation-Protected Securities (TIPS), especially shorter-term ones, and I Bonds to help your portfolio keep pace with rising prices.
Delay Social Security: Waiting until age 70 increases your monthly benefit beginning at your full retirement age, and helps ensure you receive the COLA inflation adjustments along the way.
A Comprehensive Approach
An effective strategy often combines multiple approaches:
- Start with a written plan that addresses all three risks explicitly
- Use tax-advantaged accounts strategically; Roth IRAs can provide tax-free growth opportunity and withdrawals. Roth distributions are tax free after age 59-1/2 and the account has been open for at least 5 years.
- Consider professional guidance to navigate complex decisions and coordinate strategies
- Review and adjust annually as circumstances and markets change
At Pioneer Wealth Management, we've seen how proper planning can help transform retirement anxiety into confidence. Our comprehensive approach addresses not just the obvious risks, but the lesser-known risks that can damage even well-intentioned retirement plans.
Final Thoughts: Proactive Beats Reactive
A secure retirement starts with preparation. You can’t eliminate sequence of returns risk, longevity risk, or inflation but you can build a plan designed to help you withstand them.
The lesson: act early. Addressing these risks while you’re still earning is far more effective than scrambling after retirement. Tailor your plan to your health, family longevity, risk tolerance, and income needs, but act now to strengthen your financial foundation.
Don’t let these risks disrupt your retirement. Contact Pioneer Wealth Management to discuss how our comprehensive approach to inflation and retirement risk management can help secure your financial future.
Investment advisory services offered through CreativeOne Wealth, LLC, a registered investment adviser. CreativeOne Wealth and Pioneer Wealth Management are not affiliated companies. We are not affiliated with or endorsed by any government agency, and do not provide tax or legal advice.
Investment advisory services are provided in accordance with a fiduciary duty of care and loyalty that includes putting your interests first and disclosing conflicts. Insurance services have a best interest standard which requires recommendations to be in your best interest. Advisors may receive commission for the sale of insurance and annuity products.
Licensed Insurance Professional. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Investing involves risk, including the loss of principal. No Investment strategy can guarantee a profit or protect against loss in a period of declining values. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
