Four Big Retirement Risks to Consider and Prepare For

General information, not personalised tax, legal or investment advice.

Introduction: Why Retirement Risks Deserve Your Attention Before You Retire

Retirement marks a fundamental shift from building wealth to preserving and distributing it. This transition introduces financial vulnerabilities that simply didn't exist during your working years.

The numbers are sobering. According to the Vanguard 2025 Retirement Outlook, 58% of Americans are projected to fall short of maintaining their current lifestyle in retirement. A 2024 AARP survey found that 20% of adults ages 50 and older have no retirement savings at all, and 61% worry they won't have enough to get by.

While some retirement risks are unavoidable, all four major threats—longevity, market volatility, inflation, and healthcare costs—are manageable with the right preparation. This guide breaks down each risk and gives you concrete strategies to address them—so your plan holds up however long retirement runs.

Key takeaways: Four Big Retirement Risks at a Glance

• Longevity risk: Outliving your savings as life expectancy pushes well past traditional planning horizons
• Sequence of returns risk: An early-retirement market downturn can permanently reduce your portfolio, even if markets later recover
• Inflation risk: Moderate inflation quietly erodes purchasing power over 20-30 years, threatening your standard of living
• Healthcare and long-term care risk: Medical costs are among the most underestimated expenses retirees face

Risk 1: Outliving Your Savings (Longevity Risk)

Longevity risk is the possibility of living longer than your savings can sustain. While average life expectancy at birth hovers around 77, the picture shifts considerably once you reach retirement age.

According to the 2025 Social Security Administration OASDI Trustees Report, a 65-year-old man today can expect to live an additional 18.4 years (to age 83.4), while a 65-year-old woman can expect 21.0 more years (to age 86.0). For couples, the odds are even more striking: there's a greater than 50% chance that at least one spouse will survive to age 90.

Why People Underestimate This Risk

Most people plan around their parents' life expectancy or rough averages, failing to account for generational shifts in longevity. A 2024 TIAA Institute survey found that 35% of U.S. adults underestimate life expectancy for 65-year-olds, and another 24% say they don't know. Workers who underestimate longevity are significantly less likely to save adequately, risking running out of money too soon.

Strategies to Manage Longevity Risk

Social Security Delay Strategy

Delaying Social Security beyond Full Retirement Age earns Delayed Retirement Credits—8% per year for those born in 1943 or later, up to age 70. Claiming at 70 instead of 62 can substantially increase monthly income and lifetime benefits for those who live into their 80s and beyond. That gap requires a plan for bridging income between early retirement and age 70.

Annuities as a Longevity Hedge

Annuities provide guaranteed income for life, effectively transferring longevity risk to an insurance company. The tradeoff is real: annuities typically involve upfront costs, reduced liquidity, and contracts that can be difficult to unwind. For retirees who prioritize income certainty over flexibility — particularly those concerned about outliving their assets — they can be a meaningful part of a broader income plan.

Diversified Income Strategy

A layered income strategy draws from multiple sources rather than relying on portfolio performance alone:

• Social Security benefits (optimized for timing)
• Pension income (if applicable)
• IRA and 401(k) withdrawals
• Taxable investment accounts

This diversification creates income streams that don't depend entirely on portfolio performance year to year, providing stability regardless of market conditions.

Risk 2: Market Volatility and Sequence of Returns

Sequence of returns risk is straightforward in concept but devastating in practice: if markets drop sharply in your first few retirement years, ongoing withdrawals lock in those losses permanently. During your working years, a bad stretch recovers over time. Once you're drawing from the portfolio, there's no equivalent recovery — the depleted balance compounds against you.

Why Timing Matters More Than Ever

Research by Wade Pfau indicates that compounded returns in the first 10 years of retirement explain approximately 77% of the final portfolio outcome. A 2020 Vanguard study found that retirees experiencing a full bear market in their first years had an 81% portfolio depletion rate over 35 years (using a 5% fixed real withdrawal rate). Those retiring just a year or two differently had only a 50% depletion rate and left bequests five times larger ($229,000 vs. $44,000).

Consider this hypothetical example: Two investors each retire with $1 million and withdraw $40,000 annually. Both experience the same average 6% return over 25 years, but in different sequences:

• Investor A experiences -20%, -15%, +10% in years 1-3, then steady positive returns
• Investor B experiences +15%, +12%, +10% in years 1-3, then encounters losses later

Despite identical average returns, Investor A's portfolio may be depleted by year 20, while Investor B's lasts the full 25 years and beyond. The sequence, not just the average, determines survival.

Practical Protection Strategies

Asset Allocation Shifts

Gradually shift toward a more conservative mix as retirement approaches — but don't move entirely into fixed income, which introduces its own inflation risk. A balanced approach addresses both income needs and long-term growth:

• Reduce equity exposure gradually in the 5-7 years before retirement
• Maintain some growth allocation to combat inflation over a 20-30 year horizon
• Reassess the mix annually rather than making large one-time shifts

The Bucket Strategy

This framework segments your portfolio by time horizon:

• Short-term bucket (Years 1-5): Cash and short-term bonds to cover immediate income needs, insulated from market volatility
• Mid-term bucket (Years 6-15): Moderate-growth assets to replenish the short-term bucket
• Long-term bucket (Years 16+): Growth-oriented investments for sustainability

Sentinel Asset Management applies this bucket framework across their retirement income planning work with 2,000+ clients, structuring withdrawals so that near-term cash flow stays protected regardless of what markets are doing.

Documented Withdrawal Policy

Establish in advance which accounts to draw from, in what order, and at what rate. Having a written policy before volatility arrives means your withdrawal decisions are driven by your plan — not by a market that's down 20% and a calendar that says it's time to pay bills.

Risk 3: Inflation and the Silent Erosion of Purchasing Power

Inflation operates as a long-term, cumulative threat that gradually destroys retirement income. Based on Bureau of Labor Statistics historical data, the 30-year average annual inflation rate (1996-2025) calculates to approximately 2.53%. Even at a moderate 3% annually, purchasing power erodes dramatically over time.

Real-world impact: $100,000 today becomes worth only $55,368 in purchasing power after 20 years at 3% inflation, and just $47,761 after 25 years.

Why Retirees Are Especially Vulnerable

A fixed income or overly conservative portfolio may not grow fast enough to keep pace with rising costs for essentials. Healthcare inflation historically outpaces general CPI—since 2000, medical care prices increased 121.3% compared to 86.1% for all consumer goods. Going fully conservative to "play it safe" paradoxically introduces greater long-term risk.

History backs this up: Morningstar data shows that from 1950 through 1979, long-term U.S. government bonds delivered negative real (inflation-adjusted) returns—meaning investors lost purchasing power over a 30-year horizon despite positive nominal yields.

Practical Inflation Hedges

Three strategies can help protect retirement income from inflation's slow erosion:

• Maintain equity exposure — Growth-oriented investments over a 20-30 year retirement horizon can outpace what bonds alone deliver; even a modest allocation makes a meaningful difference.
• Use Treasury Inflation-Protected Securities (TIPS) — TIPS principal adjusts with CPI, providing direct inflation protection. Yields run lower than conventional bonds, but purchasing power is preserved.
• Delay Social Security claiming — A larger benefit from delayed claiming compounds over time, and since benefits receive annual cost-of-living adjustments, that bigger starting number pays off in later years.

Risk 4: Rising Healthcare and Long-Term Care Costs

Healthcare consistently ranks among the most underestimated retirement expenses. Fidelity's 2025 Retiree Health Care Cost Estimate projects that an average 65-year-old retiring today will need $172,500 in after-tax savings to cover healthcare expenses. For a couple, this jumps to $345,000—and that's before factoring in long-term care.

The Long-Term Care Gap

Those numbers don't capture what long-term care adds to the picture. According to the U.S. Department of Health and Human Services, someone turning 65 today has nearly a 70% chance of needing some form of long-term care. Yet Medicare explicitly excludes custodial care—non-medical help with bathing, dressing, and eating—which makes up the majority of what people actually need.

The 2025 Genworth Cost of Care Survey reveals national median annual costs:

• Nursing Home (Private Room): $129,575
• Nursing Home (Semi-Private Room): $114,975
• Assisted Living Community: $74,400
• In-Home Care (44 hrs/week): $80,080

Planning Strategies

Long-Term Care Insurance Timing

Premiums rise significantly with age. According to the American Association for Long-Term Care Insurance 2025 Price Index, for a $165,000 benefit pool growing at 3% annually:

• Couple at age 55: $5,050 combined annually
• Couple at age 60: $5,800 combined annually
• Couple at age 65: $7,150 combined annually

Purchasing coverage in your 50s results in lower premiums and broader availability. Some medical conditions can make coverage unavailable later, so applying before health changes occur locks in both eligibility and better rates.

Health Savings Accounts (HSAs)

For those with high-deductible health plans, HSAs provide one of the strongest tax-advantaged vehicles for funding future healthcare costs. Per IRS Publication 969, 2026 contribution limits are $4,400 (self-only) and $8,750 (family), with a $1,000 catch-up for ages 55+. The triple tax benefit makes them especially powerful:

• Contributions are tax-deductible
• Growth is tax-deferred
• Qualified medical withdrawals are tax-free

Unused funds carry over year to year and can be invested, making HSAs a practical way to build a dedicated healthcare reserve before and through retirement.

How to Prepare: Bringing All Four Risks Into One Coordinated Plan

These four risks don't operate independently. Longevity amplifies every other risk — a longer retirement means more years of exposure to inflation, healthcare costs, and market volatility.

Research using the Health and Retirement Study demonstrates that health shocks combined with market downturns significantly accelerate wealth depletion, with permanent health shocks leading to 12-20% wealth reduction over 10 years.

A retirement plan addressing only one or two risks in isolation is incomplete. The solution requires an integrated strategy modeling all four risks simultaneously and stress-testing the plan under different scenarios.

Core Elements of a Comprehensive Plan

• Diversified income: Balance guaranteed sources (Social Security, annuities) with flexible withdrawals to create reliable income regardless of market conditions.
• Withdrawal policy: Match withdrawal rates to your risk tolerance and time horizon, and prioritize accounts in the right order for tax efficiency and longevity.
• Inflation-adjusted growth: Maintain equity exposure appropriate to your timeline — most retirees need 15-25+ years of growth to preserve purchasing power.
• Healthcare funding: Plan explicitly for Medicare gaps, out-of-pocket costs, and potential long-term care needs through insurance, HSAs, or dedicated reserves.
• Ongoing reviews: Revisit your plan at least annually and after major life changes to keep allocations, withdrawal rates, and coverage aligned with current conditions.

Sentinel Asset Management guides every client through this process using a personalized Investment Policy Statement, stress-tested against different market and longevity scenarios. With 100+ years of combined advisory experience and 2,000+ clients guided through retirement, the firm integrates all four risks into a single coordinated strategy — one built to protect your independence and quality of life for as long as you need it.

Frequently Asked Questions

What is the biggest risk in retirement planning?

Longevity risk is the most foundational, because living longer amplifies exposure to every other risk. In practice, all four risks — longevity, market volatility, inflation, and healthcare — interact and must be addressed together in a comprehensive plan.

How long will $500,000 last using the 4% rule?

The 4% rule suggests $500,000 would generate $20,000 per year in withdrawals (adjusted annually for inflation), designed to last approximately 30 years. Actual results depend on portfolio allocation, market conditions, and personal spending — so individual circumstances matter significantly.

What is the 7% rule for retirement?

The 7% rule suggests withdrawing 7% of your portfolio annually — a rate too aggressive for most retirees. Poor early returns can accelerate depletion, and the Trinity Study found only a 17% historical success rate for 7% withdrawals over 30 years.

Is $400,000 enough to retire at 70?

$400,000 at age 70 may be sufficient depending on Social Security income, spending needs, health, and lifestyle. At a 4% withdrawal rate, this generates only $16,000 per year, making supplemental income sources and careful spending planning critical for most retirees.

What are the 5 P's of risk management?

The general 5 P's stand for Predict, Prevent, Prepare, Protect, and Patrol. For retirement specifically, Sentinel Asset Management applies the PRIME framework: Purchasing Power, Reinvestment, Interest Rate, Market, and Exchange Risk — a more targeted lens for financial risk management.