Everything Changes the Day You Retire: How the Rules of the Game Change and What You Need to Know About Retirement Risks

Retirement is one of life’s most significant milestones, but it’s also a major transition in how you manage your finances. While the focus of your working years is often on accumulating assets for the future, once you retire, the rules of the game change. Now, you need to start living off those accumulated assets, and that introduces an entirely new set of risks that require careful planning.

In this article, we’ll take a dive into the top retirement risks that every retiree needs to consider and manage. These risks, such as longevity, withdrawal rates, and inflation, can impact the success of your retirement strategy and the ability to maintain your standard of living throughout retirement.

Key Takeaways

• Retirement shifts the focus from asset accumulation to asset distribution, introducing new financial risks.

• Longevity risk: People are living longer, increasing the chance of outliving retirement savings by multiplying all other risk factors.

• Withdrawal rate risk: Overspending too quickly can deplete funds before the end of retirement.

• Sequence of returns risk: Market downturns leading up to, and early in retirement can permanently reduce portfolio longevity.

• Inflation risk: The rising cost of goods and services erodes purchasing power over time.

• Strategies such as dynamic withdrawals, annuities, proper asset allocation, and diversified income sources can help mitigate retirement risks.

• A well-structured retirement income plan must account for market conditions, tax efficiency, and future healthcare costs to ensure financial stability.

  
  

Longevity Risk: The Hidden Multiplier

What It Is: People are living longer than ever. While this is great news, it also presents a serious financial challenge: the longer you live, the more money you need. Outliving your assets is one of the greatest risks retirees face, and it amplifies every other retirement risk on this list. 

Why It Matters: Studies indicate that approximately half of healthy couples will have one spouse who lives past 95 years old. As life expectancy increases, more retirees are finding that their savings need to last longer than they initially planned. The longer you live, the more likely you are to experience market downturns, inflation, changes to tax code and social welfare programs and rapidly rising health care costs, making it even more challenging to maintain a comfortable lifestyle.

How to Manage It:

• Plan for a longer retirement: We typically assume clients will live into their 90s at a minimum, even if their parents didn’t. Other factors such as very healthy couples, or parents who lived a very long time, could encourage us to plan for one spouse to live to 100 or beyond. 

  
  

• Create a flexible withdrawal plan: Rather than withdrawing at an arbitrary rate, adjust your withdrawals to adapt to changes in life expectancy and market conditions.

  
  

• Proper asset allocation: Proper asset allocation is essential for managing longevity risk. Over time, savings are increasingly exposed to inflation risk—the erosion of purchasing power. Allocating assets toward investments with growth potential, such as equities, can help outpace inflation and preserve long term financial security. Additionally, some financial products, like certain lifetime income annuities, offer inflation protection features that help maintain purchasing power. A well-structured retirement plan should balance growth, income stability, and inflation protection to ensure financial sustainability over a long retirement.

  
  

• Consider annuities: While not suitable for every retirement plan, annuities are one of the few financial products that can provide guaranteed lifetime income, regardless of market performance or investment returns. In many cases, certain annuities allow retirees to mitigate longevity risk by providing guaranteed lifetime income, offering financial stability in later years. However, annuities vary in structure, fees, and benefits, so careful evaluation is essential to determine if they align with your financial goals.

  
  

Withdrawal Rate Risk: Avoiding the Pitfalls of Over-Spending

What It Is: Withdrawal rate risk occurs when retirees withdraw too much money from their portfolio too quickly, risking running out of funds before the end of their lives.

Why It Matters: During your working years, you’re building your savings, but in retirement, you’re spending them. How much can you safely withdraw each year without running out of money? The commonly cited '4% rule' may not be suitable for all retirees due to varying factors like market conditions, interest rates, inflation, healthcare expenses and other personal financial situations. These factors make it critical to customize your withdrawal strategy. 

How to Manage It:

• Dynamic withdrawal strategies: Flexibility is key. Adjust withdrawals based on market conditions rather than following a rigid percentage.

  
  

• Diversification: Having multiple income streams (investments, Social Security, pensions, annuities) can help reduce reliance on any single source.

  
  

• Tax-efficient withdrawals: Timing your withdrawals strategically across taxable, tax-deferred, and tax-free accounts can extend the life of your portfolio.

  
  

Sequence of Returns Risk: The Timing of Returns Matters

What It Is: Sequence of returns risk refers to the possibility that the order of returns you experience during the last few years leading up to retirement, or early in retirement when you begin withdrawing funds, could lock in losses and permanently reduce your retirement portfolio’s longevity and sustainability.

Why It Matters: Aside from the obvious, that you don’t want to run out of money in retirement, there are three main concerns when experiencing market downturns early in retirement. If forced to withdraw funds during this time, you are effectively locking in losses as you sell assets at lower prices which will deplete savings faster. In addition, by having to sell at lower valuations you have to sell more assets which then leads to missed growth opportunities when markets inevitably recover. Lastly, retirees have a much shorter time horizon to recover from market losses which magnifies the negative returns early on in retirement.

How to Manage It:

• Dynamic withdrawal strategies

  • Flexible spending/ withdrawals: A variable withdrawal rate is meant to move up and down with market performance and provide a sustainable withdrawal plan. While most retirees enjoy a fixed withdrawal rate for ease of use and planning purposes, being flexible and adjusting your withdrawal rate with market performance can have a significant positive impact on the longevity and sustainability of your retirement portfolio. 

    
    

  • Bucket strategy: One common strategy is the "bucket strategy," where you divide your retirement assets into different "buckets" based on time horizons. For example, your first bucket would contain safer, short-term investments to cover your expenses in the first 2 - 5 years of retirement, while the second and third buckets would contain more growth-oriented investments for later years.

    
    

• Establish a cash buffer: Having a few years’ worth of living expenses in cash or conservative and liquid investments can prevent you from selling stocks during downturns in the first decade of retirement if needed, and help provide a piece of mind to allocate to portfolio that has a bit more inflation protection (growth) in mind.

  
  

• Diversification: A well diversified portfolio can potentially help smooth out volatility and the impact of poor returns in one asset class with gains in others, helping to manage this risk.

  
  

• Start with a lower withdrawal rate: Rather than following cookie cutter advice like the 4% rule strictly, consider starting with a more conservative withdrawal rate, particularly in the early years of retirement. Perhaps you can offset additional expenses with part-time employment, starting social security sooner or planning larger expenses (bucket list vacations and so on) until a few years into retirement. 

  
  

• Guaranteed income sources: 

  • Annuities: Certain annuities can provide a stream of lifetime income, reducing reliance on market-dependent investments during retirement. Utilizing annuities to cover basic needs expenses may help hedge against sequence of returns risk by removing the need to withdraw from your retirement savings, allowing your portfolio time to recover from a market downturn.

    
    

  • Social Security and Pensions: Maximizing Social Security and pension benefits can also provide a stable income source and reduce the need to draw down retirement savings during a market downturn in the early years of retirement. 

    
    

While there are many different studies and philosophies on how to mitigate and/ or plan for sequence of returns risk, one thing is for certain, you need to have a stress tested plan in case markets don’t act in your best interest in the first decade of retirement. 

Inflation Risk: The Silent Wealth Killer

What It Is: Inflation risk is the risk that the purchasing power of your retirement income will diminish over time (your dollar today will buy less tomorrow). Inflation can be looked at in one of two ways, but the impact on your retirement savings and wealth are the same. First, we can view inflation as the general increase in prices for goods and services over time. Additionally, we can view inflation for what it is in most cases which is the debasement of the currency. In other words, what is really happening is the currency is losing its value over time and more of the currency is required to purchase the same product or service. Recent inflation trends have been influenced by multiple economic factors, including monetary policy and increased government spending which has dramatically increased the money supply and debased the currency.

Why It Matters: Inflation is often hidden and not planned for appropriately, especially in times of long periods of low to moderate inflation. It is hard for our brains to conceptualize the real impact of inflation over long periods of time because we focus heavily on the nominal dollar figure instead of the true purchasing power over time. For instance, at a 3% annual inflation rate, $1,000,000 today could have the equivalent purchasing power of approximately only $471,358 in 25 years. A regular postage stamp was $0.33 in 2000 and $0.68 in 2024, it doubled in cost in less than 25 years. You get the point. With the average retirement plan needing to extend by more than 30 years you can see how dramatically inflation can impact your retirement savings by itself. Even a moderate rate of inflation can erode the value of fixed income streams such as Social Security (assuming COLA isn't in lockstep with current inflation rate), pensions, or annuities. Without inflation protection, you may find that the income you relied on to maintain your lifestyle doesn't stretch as far as it used to. While a fixed income may give you consistent nominal income each year, it often fails in keeping up with purchasing power to maintain your standard of living and keeping you from running out of money. 

How to Manage It:

• Invest for growth: Even in retirement (many would argue, especially while in retirement), equities should play a role in your portfolio to help outpace inflation over the long run.

  
  

• Early planning: Plan for the need to have rising income over the entire length of your expected retirement. Allow the plan to drive investment decisions such as asset allocation, withdrawal rates and asset location.

  
  

• Invest in assets that outpace inflation: Some percentage of your investment allocation should be allocated to assets that have the ability to outpace inflation. Including these in your portfolio can help preserve your purchasing power over the course of a long retirement horizon. 

  
  

• Inflation-adjusted income & Social Security optimization: Delaying Social Security benefits can increase your inflation-adjusted income later in life. Consider other income streams that adjust with inflation, such as annuities with built-in inflation protection riders.

  
  

Deflation Risk: A Less Common but Dangerous Threat

What It Is: While inflation is the more common concern, deflation (falling prices) can be equally problematic. Deflation risk occurs when the general price level of goods and services declines, potentially leading to a reduction in asset values and economic stagnation.

Why It Matters: On the other side of the coin from where inflation sits, deflation poses its own set of risks . Lower asset values, particularly in stocks and real estate, could reduce the value of your retirement portfolio. Due to the decreased value of the retirement portfolio, additional assets would need to be withdrawn to cover fixed living costs like mortgages and so on. Additionally, a deflationary environment may signal reduced economic activity and fewer opportunities for growth for longer periods of time. Another consideration is that deflation magnifies retirement risk for those with debt as fixed payments remain the same while asset values decline.

How to Manage It:

• Cash reserves: The purchasing power of cash (local currency) increases during times of deflation which increases your purchasing power. Having a cash reserve can help cover essential expenses without the need to sell deflated assets at a loss. Essentially, cash reserves can buy you some time while the market and prices stabilize.

  
  

• Diversify: Diversifying your portfolio so it is not overly concentrated in any one asset class that might be hard-hit during deflationary periods. 

  
  

• Fixed income: Fixed income investments can help mitigate deflation risk, as the real value of a fixed cash flow increases when prices decline. In a deflationary environment, purchasing power improves because the cost of goods and services decreases while nominal fixed payments—such as bond interest or annuity payouts—remain unchanged. This makes high-quality fixed-income assets a potential hedge against deflationary periods, ensuring stable income when the broader economy contracts.

  
  

• Flexible withdrawal strategy: Having the ability to adjust withdrawals based on economic conditions ensures greater financial security.

  
  

Health Care Costs: A Growing Concern

What It Is: The risk that your healthcare costs will rise too quickly due to unforseen poor health/ accidents, or the cost of healthcare inflates too rapidly. Health care costs in retirement can be substantial, including premiums, out-of-pocket expenses, and long-term care.

Why It Matters: As you age, health care costs typically rise (faster than avg. inflation rate in the past several decades), and Medicare doesn't cover everything. Unexpected medical expenses can quickly eat into your retirement savings if you're not prepared. Entire retirement savings get wiped out due to medical costs, and medical debt is the leading cause of bankruptcy in the United States still today. 

How to Manage It:

• Medicare planning & supplementary insurance: Understanding when and how to enroll in Medicare can help avoid penalties and unexpected costs. Medigap or Medicare Advantage plans can help cover expenses that aren’t covered by Medicare, such as co-pays, deductibles, and prescription drug costs.

  
  

• Long-term care insurance: Consider long-term care insurance or a hybrid life/long-term care policy to protect against the high cost of extended care. End of life long-term care can cost hundreds of thousands of dollars and is not traditionally covered by Medicare and is means tested for Medicaid. This means if you don’t have a plan for long-term care the government will provide a plan for you that involves spending down your assets to qualify for government subsidized long-term care. 

  
  

• Health savings account (HSA): If eligible, explore maxing out/ contributing to an HSA during your working years. HSAs offer tax advantages and can be used to pay for health care expenses in retirement. HSAs reduce taxable income when contributing, can be invested and grow tax free and can be withdrawn tax free for qualified medical withdrawals. In addition, HSAs are treated similar to IRAs after the age 65. Withdrawals for non-medical expenses after the age of 65 are taxed like traditional IRAs. These unique attributes of the HSA make this type of account a worthwhile consideration for long term medical expense and retirement planning.

  
  

Tax Risk: Planning for Changing Tax Rates

Taxes are often the largest lifetime expense for most of us, and many retirees fail to consider how taxes impact their income (especially in retirement). Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, and Required Minimum Distributions (RMDs) can push retirees into higher tax brackets as they progress through retirement. While we can’t say for certain what the ordinary tax rates or capital gains tax rates will be in the future, we can acknowledge that the current amount of government debt ($36.64 TRILLION) coupled with some of the lowest tax rates in history is concerning and unlikely to be able to continue through our lifetimes.

What It Is: Tax risk refers to the uncertainty around future tax rates and how they might affect your retirement income.

Why It Matters: If taxes rise in the future, your retirement income could be reduced, especially if a significant portion of your savings is in tax-deferred accounts like IRAs or 401(k)s. Even taxable brokerage accounts and gains in other asset classes like real estate can be significantly impacted by changes to short-term/ long-term capital gains rates. The current tax environment may not (probably won’t) be the same when you begin withdrawing, or throughout a long 30+ year retirement. Hedging against this risk with long term tax planning and diversification can be the difference of tens or hundreds or even millions of dollars over your lifetime. You have no obligation to pay more in taxes than what is legally required. 

How to Manage It:

• Roth conversions: Converting assets to a Roth IRA and paying taxes in lower-income years can reduce future tax burdens and hedge against future tax risk.

  
  

• Tax-efficient withdrawal strategies: Conventional wisdom would say to prioritize withdrawing from taxable accounts first, then tax-deferred and then tax-free. That said, there is much to consider on the individual level and the conventional withdrawal strategy might not be the most tax efficient model for everyone. My advice is to seek professional advice in most all cases in regard to the sequence of withdrawals and the unintended consequences they may have. For instance, accounts like the traditional IRA and other qualified retirement plans typically force you to take Required Minimum Distributions (RMDs) which could potentially increase your tax liability more than necessary had you elected for a strategy such as Roth conversions earlier in your retirement. The point is, tax risk is real, and tax efficient investment and withdrawal strategies can save you an enormous amount of lifetime taxes. 

  
  

• Diversification of tax strategies: Investing and accumulating a mix of taxable, tax-deferred, and tax-free accounts (like Roth IRAs) can provide more flexibility and help reduce taxes in retirement. Having a tax strategy that minimizes your tax liability during the accumulation phase of your life that balances with a strategy that mitigates tax risk through retirement is a challenge. Working with a tax focused financial planner or tax advisor is ideal for most people.

  
  

Conclusion: Managing Risks for a Secure Retirement

Retirement may seem like the end of the road, but it’s actually the beginning of a new phase—one that requires careful planning and risk management. Longevity, withdrawal rates, sequence of returns, inflation, deflation, health care costs, and taxes are just some of the risks you need to navigate to ensure your retirement lasts as long as you do.

Managing these risks effectively requires a comprehensive strategy that takes into account your unique goals, income needs, and risk tolerance. Working with a financial planner who understands the complexities of retirement can help you build a plan that addresses these risks and keeps you on track for a financially secure and fulfilling retirement.

Let’s Build a Retirement Plan That Works for You

Retirement is one of the biggest financial transitions of your life. Don’t leave it to chance. If you’re ready to plan out the retirement you’ve been working for all these years, protect your retirement from unnecessary risks and ensure your financial security, we’re here to help.

Schedule a consultation today to start planning for a confident and secure retirement.

Email: Mark@brookwoodfs.com

Phone: (248) 325-8816

For more insights on financial planning, risk mitigation, insurance solutions, estate planning and more, check out our other resources:

• Free Resource Center with multiple calculators, templates and checklists.

• 22 Money Myths that are Keeping Us Poor, Confused and Afraid of Money

• Win with Money: You owe it to Yourself, Your Family and the World

Disclaimer: This article is for informational purposes only and should not be considered financial, tax, or legal advice. Please consult a qualified professional before making any financial decisions.