7 Biggest Financial Risks of Retirement

  • Rampant retirement risk

    Heading into retirement can raise a slew of scary questions. Will unexpected expenses throw off your retirement plan? Could a market crash decimate your carefully built nest egg? Most important, do you have enough money to last you through your golden years?

    Taking a closer look at the risks of retirement can allay some of those fears. After all, financial service professionals spend their days studying the many retirement risks you face and finding clever ways to hedge against them.

    "Far too many people focus on the main principal risk and the fear of losing money," says Casey Mervine, a Schwab financial consultant. "There are other risks that can be managed."

    Learn how to protect yourself against seven of the biggest retirement risks you'll face.

  • Retirement risk No. 1: longevity

    Back in 1935, when Social Security was first established, the average life expectancy was only about 61 years. That number has been rising ever since, to 78 currently, according to Stephen Horan, head of private wealth management for the CFA Institute and co-author of "The New Wealth Management." Moreover, once you've already made it to age 65, you're likely to live until 81 or 83 years old.

    A healthy diet, exercise and a history of long-lived ancestors can boost your life expectancy still higher. So even if you think you're going to live until age 85, you need to plan for the possibility you'll make it to age 95 or 100, Horan says.

    "Overwhelmingly, the biggest one is the risk of outliving your money," says Ken Fisher, chief executive officer of Fisher Investments."Most people underestimate the amount of time they're going to live, and they invest as if they're going to die in 10 years."

  • Retirement risk No. 2: inflation

    Another key risk is inflation, the inevitable increase in the cost of goods and services, including housing, clothing, food, electronic devices and health care. Even with very low rates of inflation, say 3 percent a year, you would lose half of your purchasing power over two decades, Mervine says."That's probably the biggest risk to investors' long-term ability to make ends meet," he says.

    To guard against inflation, you can invest in inflation-protected securities or other investments that will gain value as overall prices climb. For instance, stocks in your portfolio aimed at growth rather than income will provide a hedge against inflation, says Michael Reese, Certified Financial Planner and founder of Centennial Wealth Advisory based in Traverse City, Mich.

  • Retirement risk No. 3: the market

    When you hear the word risk, the danger that usually springs to mind is market risk. That's the scenario in which you've amassed a healthy portfolio of stocks and bonds only to see it plummet in value because of a market crash or other disruption to the global financial system.

    The solution: Diversify your portfolio among a healthy mix of stocks, bonds, commodities and real estate, with no outsized holdings in one company's stock. On the stock side, a portfolio would be allocated among several asset classes, geographic regions and companies of various sizes. It should reflect a combination of value, growth and dividend-paying investments. On the fixed-income side, it would be invested mostly in government and investment-grade corporate bonds with varying terms and durations.

    "Diversification is one of those free lunches," Mervine says. "The more diverse a portfolio, the better."

    Next >

    Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.