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The 5 Major Risks in Retirement

Season #2

As investors transition into a new phase of their lives, it is critical to recognize and address the five major risks that could impact their financial well-being. Every financial decision should be made through the lens of how it impacts these risks.

  1. Drawdown Risk The first major risk retirees face is drawdown. This refers to anything that decreases the value of one's retirement savings or portfolio, whether through taxes, market loss, inflation, or having to pay retail for everyday items. As retirees, it is vital to conserve as much capital as possible, so it can be spent on the things that matter and be there when needed.

  2. Inflation Risk The second risk is inflation, which is the inevitable increase in the cost of living over time. Inflation erodes buying power, making it crucial to invest wisely and not simply store money under the mattress. Failing to protect one's nest egg from inflation can lead to financial struggles in retirement, such as an inability to pay rent or put food on the table.

  3. Longevity Risk The third risk is longevity. As medical advancements continue to progress, people are living longer, healthier lives. This means retirees must ensure their savings will last long enough to support them throughout their golden years. To do this, individuals must balance risk and make assumptions about how long their money needs to last.

  4. Unexpected Expenses The fourth risk involves unexpected expenses that arise due to aging or unforeseen events, such as a medical emergency or damage to one's home. It is crucial to be properly insured and prepared for these expenses to avoid sudden financial strain during retirement.

  5. End-of-Life Planning The final risk is the inevitable end of life. Retirees must plan for their last few years and ensure a smooth transition of finances to their loved ones. This includes having insurance policies, a financial plan, and a legal plan in place to prevent surviving spouses from inheriting debt or dealing with financial chaos.

In conclusion, retirees must consider these five major risks when making every financial decision, including when to file for Social Security. By addressing these risks head-on, retirees can better ensure a financially secure and enjoyable retirement.

Below is the unedited transcript.

There are. Five major risks that I see a or for retirees. It's for everyone in general, but it's specifically once we, as we're transitioning into retirement and you need to start thinking about this, within a few years of retirement.

But there are five major concerns and really every financial decision you make shouldn't be made through the prism, through the lens of how does it impact me for. Five major risks. And those five major risks are, number one, is draw down, right? So anything that decreases the value of your retirement, savings of your portfolio doesn't matter whether it's taxes or market loss or inflation or having to pay, retail for something.

And I was talking to someone the other. And I was like, listen, toilet paper, right? You know how much toilet paper you use? Just buy it up in bulk, right? So that you save that money, right? And it's not a lot of money, but if you're looking for ways to save and that can make a difference.

We know how much toilet paper we're gonna use. Everything is a, it really is a penny saved as a penny earned. And when it comes to retirement, we need to hold onto as many pennies as possible. , everything that decreases the value of our portfolio. It doesn't just affect us today.

It affects our entire retirement. It affects, five years from now, 10 years from now, 20 years from now, I have done analysis for clients and I've shown them how just saving. Figuring out how they can save 5,000 or 6,000 or $10,000 a year, right? And we're not talking about a lot of money, at least in, in portion for them.

But we're talking, saving five, 10% off of your annual expenses. And again, that can come from taxes. It can come from maximizing your social security. It can come from, buying wholesale instead of retail. It doesn't matter where it's coming from, but that can have such a huge impact. It can be the difference between running outta money.

It can be the difference between, living the life and not worrying about what you're spending to, pension pinching pennies. And, not seeing the grandkids as often as you'd like.  number one, biggest risk is you gotta make sure that the decisions you.  and the things that you are doing, protect your retirement, nest egg as much as possible, and conserve as much of that capital as possible so that you can spend it on the things that you want, and it'll be there when you need it.

Draw down risk number one, right? Risk number two. . Okay. Risk number two is inflation, right? Inflation is the second biggest risk, and I put this on the list, it, it's, draw down, brings down the value portfolio.  inflation is that you're gonna have to spend more money than you planned in order to meet your living expenses.

We usually, I have to teach this a lot and I have to explain this, and people just look at me and ignore me. But the last two years, right? We really know what inflation is. Yes, we do.  And here's the thing, right? You just to put it in perspective, how bad inflation has been. It used to be that if you looked in the last hundred years, inflation was an average of 3%.

So if you took all the inflation that we experienced and average that was 3% a year because of the last two years, that's now 4%. Wow. 4%, four, over the last a hundred years. And so when you're thinking about, okay, how do I protect myself, right? It's, we need to keep an eye on and make sure.

The, our assets are, we can't just put them under our mattress in cash. I actually had someone comment that on Facebook. I put out a.  Saying, what's the worst things that, you know a retiree can do with their money? And one person said, what happened in the stock market?

Cash is king. Put it, under your mattress. And, I didn't tell this guy off, but here's the truth, right? If you put your money under the mattress, you are guaranteeing a loss. You are guaranteeing that your money is going to devalue your buying power is gonna devalue. And you're guaranteeing that in 10 years of 15, 20 years.

You're not going to be able to live the same life that you have right now. I, I don't know. The last time we had inflation like this it was sometime in the nineties. And it wasn't even this high. It was like, four or 5%. But it happened for a few years and. , people's social security checks were not meeting their needs.

And I remember people talking about the fact that, they couldn't pay their rent.  Because they were, their budget was so tight. That's what happens when you don't protect your portfolio from inflation. When you don't protect your nest egg from inflation, then what ends up happening is, You're going along just fine.

You start dipping into your savings and before you know it, you're struggling to pay your rent. You're struggling to put food on the table, so we always need to keep in mind. That there will be years like this where inflation is, 8%, 10%, right? That could happen At the same time, there's also the steady erosion of inflation, because that's what drives our economy.

The Fed is targeting a 2%, inflation. That means our economy is growing. That means wages are growing. That means things are healthy, when things are unhealthy. , right? It grows a little too fast or it goes negative, but we always have to keep in mind on that, right? So that risk number one, draw down, right?

Devalue in our portfolio. Risk number two is inflation, that we, our buying power is gonna decrease, which brings us to number three, which is longevity, right? , every assumption out there, every analysis, any advisor you go to, they're going to use an assumption for how long you're gonna.  right the way, if you think about the 4% rule that is not based on you living for forever, people talk about it like, oh, if you have the 4% rule, you do the 60 40 or 50 50 or whatever, you're never gonna run outta money in retirement.

That is not what that rule says. That is not what any of those studies say it was that you won't run outta money in 25 years or 30 years. . It wasn't that it was gonna be for forever, but eventually it will happen.


eventually that's where you need to be a good steward of your money. If you protected your money well from drawdown and you protected it from inflation, right?

And then you factor in, maybe I live longer than I expect, then you have a potential that maybe your assets will actually grow in retirement and not.  because that is the ultimate goal. But that requires balancing. Now, for a lot of people, they may not have enough money to retire today, right? If they wanna be super conservative.

So they have to take on more risk, and they may, they will have to eat up some of their principles. So you're gonna have to make assumptions of, how long do I need this money to last? And you wanna make sure that you bake into those assumption.  that you've lived long enough and that you're not running outta money by the time you're 85.

Because maybe you're gonna live to 90. Medicine's always getting better and better. That's true. People are staying healthy longer. It's e easier to stay alive longer. I think it's 10% of social security beneficiaries are over the age of 90 or 100. It's it's a very high number.

Wow. And who knows what that's gonna be in 15 or 20? So longevity, right? Making sure that as you get older, you're not looking at the gas gauge going, I'm running on empty, I'm running on fumes. That you're not worried about that, so that you can enjoy your retirement, you can enjoy your time with your family, and this time that you've earned and deserve.

Which brings us to number three, right? We're number four, which is number four. Sorry, number four, which is the inevitable, right? The unexpected expenses and the inevitable, right? Listen, we all get old . We all have body parts that start failing. That is just a reality of life, right? It's either we get hit by a bus and not, and die, without all of that, or something happens, right?

And we, our body so slowly fails on us. We get sick, this is just the reality of life. Now, what. In those unexpected expenses, right? Whether it's a tree falling out in our house or it is, we get sick, right? And we have an extended stay. You fall, right? And now you're in rehab and you for a few months, those are expenses, correct?

Those are things Now, if you think about it, right? And we don't like to think about it. , but we need to prepare for them because if we don't prepare for it, what's gonna happen? We're gonna have a sudden and massive expense in our retirement at a time when we can't withstand it, right? When we probably don't have the savings for it.

And all of a sudden, when you have that massive expense, if we are not properly insured and we're not properly prepared, it will completely destroy the rest of our retirement, and we'll go from living comfortably to having to move in with our kids or having to. Into a facility or downgrade or who knows what.

And so we wanna make sure that we're properly insured and we're properly protected. And most importantly, that we don't hurt our surviving spouse because let's face it. Almost certainly one spouse is gonna outlive the other one, right? Usually by a wide margin. . So we wanna make sure that surviving spouse isn't inheriting debt, that they're not inheriting a financial mess, and it doesn't take a lot of work to make sure that we have those insurance policies in place, that we make sure we have a financial and a legal plan in place to take care of that.

. But you wanna make sure to do that, which brings us to number five which is, the inevitable, right? We will die even. . And we wanna make sure that we're prepared for that, right? Both for those last few years of our life, as well as for transitioning over our finances to our loved one.

I have seen too many people get hurt by that, where they were not prepared for it, and, Bad things can happen when you're not prepared for it. And it can be, whether it's expenses or it's, bank accounts get frozen, nobody knows what to do, and all of a sudden things are getting sold that shouldn't get sold, or creditors are coming after things and everything falls apart.

So you wanna make sure that you have a plan in place to take care of it, . And so the five major risks, right? Just to recap, five major risks, right? Portfolio decreases in value to draw down inflation. We can't buy as much as we need to. We can't maintain our lifestyle longevity. We live longer than expected because a life is awesome.

And then we have unexpected expenses. Tree falls on our house. We trip and fall, things like that. And then we have the inevitable that happens to all of us, right? And so we need to make sure to prepare for and plan for these things. And in really every single decision in our life, it affects something like this.

Now, let's take Social Security, right? Social security is a decision that everyone needs to make. We all need to make this decision of when do we file for social security? Are we taking it early? Are we taking it late?  When you're thinking about that, right? You need to think of it in the context of these five questions because these five questions will tell you, do I need to take it early?

Does more money now, earlier in retirement, taking, sorry, less money earlier in retirement, that's gonna help me more than more money later in life, right? , I've talked to a lot of people. My dad died at 63 right. Waiting until age 70. So he got the bigger check. Wouldn't have helped anyone. Oh my gosh.

And him taking social security as early as possible allowed not only him to take, to get benefits, but allowed my siblings right. And his wife to get benefits. And so a lot more financial value. And a lot more value as survivor benefits, right? So you gotta think about that. You gotta think about what's more important now versus later.

How will that affect you over the lifetime, right? Over your lifetime, over your spouse's lifetime. And so you really gotta think of it from that holistic context. And every decision. It really is. Every decision needs to be done through the prism of those five questions.