Retirement should be one of the best times in your life. But older Americans face some substantial risks -- and if you aren't prepared for them, they could turn your later years into a stressful time instead of a reward for a lifetime of hard work.
The Center for Retirement Research has identified five specific big risk factors retirees often face and need to plan for.
1. Longevity risk
Longevity risk is defined as outliving your projected lifespan. If you live longer than your savings, you could struggle to get by on Social Security alone, which would provide income that's just barely above the poverty level.
The best way to plan for longevity risk is to make sure you have a large retirement nest egg that will provide sufficient income at a safe withdrawal rate. If you need to produce $30,000 in income from your retirement savings account, for example, you'll want to make sure you've invested at least $750,000 before leaving the workforce if you plan to follow the 4% rule.
You can also minimize longevity risk by taking steps to maximize your Social Security benefits, including claiming them as late as possible to avoid early-filing penalties and to earn delayed-retirement credits. A larger Social Security check means even if your savings runs out, you won't face as much financial struggle, since this source of income is guaranteed to last for the rest of your life.
2. Market risk
Market risk refers to the possibility of investment losses. These losses can happen even in retirement, as retirees generally need to have some money invested in the stock market in order to earn reasonable returns. However, you can minimize market risk in a few different ways.
First and foremost, you'll want to maintain an appropriate asset allocation and not invest too much of your nest egg in stocks. Ideally, you should also have enough liquid cash to cover as much as two to five years of living expenses to reduce the likelihood that you'll have to sell investments at a loss.
You can also minimize market risk by making sure you have a sound investment strategy and that you've built a diversified portfolio. For many retirees, investing in index funds is a simple and easy way to diversify, but smart investors can often do well by picking individual stocks too.
3. Health risk
Health risk refers to unexpected and costly health problems. Sadly, seniors are likely to face some years of poor health that result in outsized medical expenditures -- especially for those who need long-term care. The best way to mitigate this risk is to get regular preventative care, take steps to stay healthy such as exercising and eating right, and factor in healthcare spending when setting retirement savings goals.
If you can save in a health savings account or have a dedicated investment account for healthcare costs, you should be well prepared. But if you've already reached retirement without funds set aside for medical services, make sure to shop carefully for insurance during the Medicare open enrollment to find the policy best suited to your needs. You can also explore the possibility of purchasing long-term care insurance, and consider working with an estate planning attorney to make a Medicaid plan.
4. Family risk
Family risk refers to the unforeseen needs of family members. Seniors could, for example, find themselves serving as the caregiver for a sick spouse, or providing financial support to adult children.
Planning for this risk is difficult, but it involves having tough conversations with loved ones about what you can and are willing to do. You may decide, for example, that you and your spouse should purchase a long-term care policy so you don't run through a joint nest egg if one of you gets sick, or you may have to limit the money you're willing to give your kids so you don't jeopardize your own retirement security.
5. Policy risk
Finally, policy risk refers to the possibility of retirement benefit cuts. And this is a serious risk, as Social Security's trust fund is projected to run out of money in 2035, necessitating a 24% cut to Social Security benefits.
The best way to minimize this risk is to make sure you aren't reliant on government benefits. Try to make sure you can live on your savings alone. That way, any money you get from Social Security will just provide extra income, and your financial security won't be reliant on politicians doing the right thing.
You should also pay careful attention to every potential candidate's position on Social Security, vote with your benefits in mind, and contact your representatives to make your voice heard.
You can minimize the five big risks retirees face
As you can see, retirees face a lot of risk -- but you can minimize the potential threats to your financial security by taking a few simple steps. Get started today, so you can make sure you have the security you deserve as a retiree.