7 Threats To Your Financial Freedom In Retirement

Many factors determine how happy and fulfilling your retirement will be. Smart financial planning can increase your chances of maintaining financial freedom for as long as you live. Here are some of the biggest risks to having a secure and happy retirement I’ve seen over the past twenty+ years helping my retirement-planning clients achieve financial freedom.

Risk Of An Unhealthy Retirement

The more aches and pains you suffer, your retirement will likely be less satisfying. Knee pain might not kill you, but it could limit the activities you find enjoyable in retirement. I am writing this as a healthy financial planner, not a health expert. All of us have room to improve how we eat. We can also take steps today to increase our health span in retirement (increasing our healthy years as we age).

Being healthier will afford you more opportunities for a happy and fulfilling retirement. However, being unhealthy could place limitations on you and be quite expensive. According to the Fidelity Retiree Health Care Cost Estimate, the average couple retiring at age 65 in 2022 may need approximately $315,000 saved (after tax) to cover healthcare expenses in retirement. This staggering number is your out-of-pocket cost taking into account insurance. While reducing the number of preventable, chronic illnesses you may need to treat won’t eliminate your medical expenses, it will likely reduce them.

Longevity Risk In Retirement

Many of the signs of aging won’t kill us anytime soon. I don’t recall anyone dying from an overabundance of fine lines and wrinkles. One of the biggest risks to your financial freedom in retirement is living longer than expected or outliving your savings and investments. Fewer retirees have pensions or guaranteed lifetime income (beyond Social Security).

Retirees should be aware that their retirement savings may need to last longer than expected.

The Risk Of Not Saving Enough For Retirement

Ideally, by the time you retire, you should have saved nine-to-ten times your annual salary. These numbers may vary depending on your lifestyle expenses, health, and other factors, such as having paid or nearly paid off your home mortgage.

If you are still working, take the time to develop a financial roadmap to increase your savings and get on track for financial freedom in retirement.

Retirement Risk Of Spending Too Much

There are some costs you have limited control over after you have retired. These include things like rent, medical care, and just plain inflation eroding the purchasing power of your retirement income. For the average retiree who did not save enough for retirement, living off the income provided by your retirement assets and Social Security will not be possible. That is not to say you can minimize spending in certain areas to reduce the risk of running out of money.

While you don’t control tax rates, tax planning can help you keep more of your retirement income.

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Inflation Risk to Retirement Security

Even the best-laid retirement plans are affected by inflation. Until recently, we had been in a low-inflation environment. Even then, retirees would see their purchasing power cut in half over a 30-year retirement. As inflation rates increase, the drop in purchasing power is reduced at an even faster pace. For example, with 8% annual inflation, your purchase power will be cut in half in just nine years.

Lack of Stock Market Risk

While you can’t control inflation, you can plan for it. Putting all your money into a fixed annuity, bank account, or CD with guaranteed returns may be tempting, but those options likely won’t keep you ahead of inflation. The younger and/or healthier you are, the more your investment portfolio should be invested in stocks (or stock-based ETFs or Mutual Funds).

Stock Market Risk

It seems many retirees view the stock market as the biggest risk to their retirement income. To be fair, if the stock market never went down and returned 30%+ each year, many people would still only see their financial issues reduced, but not always eliminated during retirement.

As we saw in 2022, the stock market does, in fact, go down, and the drops can be quite painful. However, if you zoom out and look at how much money the stock market has made over time (including every down day), the stock market outpaces bonds, bank accounts, and even real estate.

Unfortunately, the annual DALBAR studies have shown that the average investor greatly underperforms the stock market and, in many cases, even under perform their own in investments. Often people buy or sell investments at the absolute worst time.

You may be at a bigger risk from some of these seven financial freedom destroyers depending on your circumstances. Work with your Fiduciary Fee-Only Financial Planner to develop a happy retirement roadmap while reducing your risk of running out of money as you age.