As you work toward achieving financial goals such as early retirement, buying a second home, or funding your child’s education, there’s one obstacle that can threaten your asset growth and preservation like no other: risk. Understanding and mitigating risk is essential to ensuring your long-term financial success. Here are five common risks to be aware of and strategies to manage them.

1. Inflation Risk and Its Impact on Your Portfolio

Even though inflation has recently decreased from its 2022 highs, it can still gradually erode the purchasing power of your savings and investments. Over time, even modest inflation can chip away at the value of your portfolio, making it harder to maintain the lifestyle you envision for your retirement.

To counteract inflation, it’s important to review your portfolio with your wealth advisor. Together, you can ensure that your asset allocation includes growth-focused investments that can outpace inflation. Additionally, keep inflation in mind when planning your retirement withdrawals to ensure your income keeps up with rising costs.

2. Market Timing Risk and Withdrawals During Downturns

One significant risk for retirees is market downturns coinciding with the start of withdrawals. This is known as sequence of returns risk. If the market experiences negative returns just as you begin taking withdrawals, it can deplete your savings faster than anticipated, leaving you with less in the future.

To manage this risk, consider developing a strategy with your wealth advisor that includes reviewing your cash flow and adjusting discretionary spending when necessary. Stress-testing your portfolio against different market conditions can also help you better plan for the possibility of future volatility.

3. Being Too Conservative with Your Portfolio

As you approach retirement, it’s natural to become more conservative with your portfolio. However, leaning too heavily on low-risk investments such as bonds can lead to missed growth opportunities. While capital preservation is important, you still need a growth component in your portfolio to combat inflation and ensure your savings continue to grow.

A balanced approach, incorporating both growth investments and more conservative holdings, can help you maintain a well-rounded portfolio. It’s crucial to develop a strategy that allows for growth while still managing risk appropriately.

4. Planning for Unexpected Health Care Costs

Health care costs, particularly long-term care, are a significant concern for many retirees. As the population ages, more individuals will need assistance with daily living activities, and the costs associated with long-term care are rising. For example, in 2023, the annual median cost of a private nursing home room was over $116,000, marking a nearly 5% increase from the previous year.

To plan for these potential costs, it’s wise to work with your wealth advisor to determine the best way to fund long-term care. Options include setting aside savings, purchasing long-term care insurance, or adding a long-term care rider to a permanent life insurance policy. Planning ahead can help ease the financial burden if long-term care becomes necessary.

5. The Risk of Outliving Your Retirement Savings

One of the most common concerns among retirees is outliving their savings. A recent survey found that only two-thirds of workers are confident they have enough saved for a comfortable retirement. This uncertainty is prompting many to delay retirement or cut back on expenses both now and in the future.

To mitigate the risk of outliving your savings, consider maximizing your retirement contributions, including catch-up contributions if you’re over 50. Additionally, delaying Social Security benefits can result in a higher monthly payout, providing more income in the long run. Working with a financial advisor to develop a solid retirement plan can help ensure you have enough to live comfortably throughout your retirement years.

Conclusion

Managing risk is an essential part of securing a successful retirement. By taking proactive steps to address inflation, market volatility, health care costs, and the risk of outliving your savings, you can create a strategy that will protect your financial future. Regularly reviewing your portfolio with your wealth advisor and adjusting your approach as needed can help you stay on track and achieve your financial goals.