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Most people are focused on the wrong risks to their financial futures, and that increases the risks they face. When a financial or retirement plan fails, it’s usually because key risks were misunderstood or mis-estimated, and people are focused on risks that are less likely to derail their plans.
In general, retirees and pre-retirees focus on the investment markets. They believe their plans are likely to succeed or fail based on market performance. To many, the greatest risk to their retirement plans is market risk. They’re concerned the most about market volatility, according to a recent study by the Center for Retirement Research at Boston College.
Yet, that’s not close to being the biggest risk for retirees and retirement plans.
The researchers at the Center for Retirement Research analyzed and ranked the different risks retirees face. They concluded that the greatest risk is the possibility of living a long time, known as longevity risk. Most retirees and pre-retirees downplay this risk, because they underestimate their potential life expectancy. Many people don’t realize they have a high probability of living into their 80s and that in a married couple at least one spouse is highly likely to live past age 80.
Longevity is a risk, because the standard of living must be maintained during those additional years. That puts a lot of pressure on the nest egg. In addition, longer lives usually are associated with additional costs for medical care and long-term care.
The second greatest risk retirees face is related to longevity. It is the cost of health care. The researchers found that retirees and pre-retirees are especially likely to underestimate the amounts they’ll spend, especially late in life, on medical care .The third most significant risk also is related to longevity, and that is the cost of long-term care.
Advances in medicine increase life expectancy but also cost money and make it more likely a person will live long enough to need some level of long-term care.
Because we have finite resources to help us make it through the post-career years, it’s important to understand the risks of retirement. We need to know which risks have a higher probability than others and how much the risks could cost.
A lot about retirement changed over the last few decades, and more changes are coming. A result is that many people don’t properly assess their retirement risks and face a higher probability of exhausting their resources. Instead of over-analyzing the markets, focus on plans to minimize out-of-pocket expenses you’ll incur for medical expenses and long-term during those additional years of life you’re increasingly likely to have.