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Published: Jul 08, 2022 7 min read

Preparing for your golden years requires a lot more than day dreaming about digging your toes into a sandy Florida beach or breathing in the salty air while cruising the Mediterranean.

Americans are living much longer, retirement costs are compounding, and pension plans — a retirement-staple in previous decades — are rapidly going extinct. While there are many risks that face retirees, new research suggests older Americans often underestimate the biggest and most likely problems they'll encounter.

“Planning for retirement has always been challenging because retirees face numerous risks and may not perceive them accurately,” writes Wenliang Hou, the author of a new paper published by Boston College’s Center for Retirement Research.

Hou’s research objectively ranks the biggest risks facing retirees, while also tracking how retirement-aged Americans perceive these risks. Unsurprisingly, there are some mismatches: For example, Americans tend to overestimate market volatility and underestimate their longevity and the toll it will take on their finances.

Here’s a look at the five biggest risks retirees face — as well as some advice for minimizing those risks.

1. Outliving your money in retirement

The biggest threat retirees face is outliving their retirement savings, according to Hou’s research. He refers to this as the “longevity risk.”

While it’s great news that Americans are living longer, the extra years come at a price. Americans often underestimate how long they’ll live — and therefore also underestimate how much money they'll need in retirement. “It is not surprising that longevity risk tops the list, because it affects the planning horizon for the retirement period,” Hou wrote.

What can you do to help pay for the added costs of living a longer life? To get some extra mileage out of Social Security benefits, retirement experts often recommend older Americans delay their retirement until age 70, if possible.

“The payoff from waiting until age 70 to start your Social Security benefit is the best investment you can make for your retirement,” Suze Orman, financial advisor and author, wrote in The Ultimate Retirement Guide for 50+.

2. Higher-than-expected medical costs

Health care expenses are a major financial risk to retirees, and it’s one they often miscalculate, according to Hou.

Recent research from Fidelity Investments shows that the average 65-year-old retired couple can now expect to pay $315,000 on medical expenses in retirement. Last year, that number was $300,000. Since Fidelity first began calculating the figure 20 years ago, estimated health care costs for retirees have almost doubled, and the vast majority of Americans report they aren’t prepared to cover the skyrocketing costs.

Experts often recommend long-term care insurance — preferably purchased long before you need it, in your 50s — as a way to help defray medical costs later in life, as can health savings accounts (HSAs) thanks to their major tax perks.

3. Stock market volatility

Americans subjectively think volatility in the stock market will be the biggest risk to their nest egg, but it’s actually the third largest risk, according to Hou’s ranking.

Who could blame them? Market swings stress most investors out, and for those approaching retirement, it can induce panic. Given that stocks officially entered a bear market in June, these fears have only heightened lately.

Kicking off your retirement during a bear market isn’t ideal, and experts recommend delaying your retirement if possible.

"If it were me and I was going to declare I’m retired and have my retirement party, I'd look to delay it a year or even two if I could," Chris Orestis, president of Retirement Genius, recently told Money.

That can help twofold by increasing your Social Security benefits while allowing for markets to recover. Whatever you do, don’t throw in the towel by cashing out your investments.

“The only thing worse than missing out on gains in a bull market is locking in your losses in a bear market,” he said.

Bear market or not, financial experts suggest you change your allocations as you get older to limit your exposure to the stocks — thus reducing the sting of volatile markets.

4. Family expenses

Aside from all the financial snafus you could personally face in retirement, your family will likely have unforeseen emergencies and expenses that you’ll need to cover.

For example, if you and your spouse were expecting to work throughout retirement to cover costs, that plan could easily be upended if one of you were to fall chronically ill — or worse. The Social Security Administration does provide 100% survivor benefits if you are at full retirement age, but it may not be enough to cover your specific situation — especially if your spouse was working. Likewise, a divorce later in life could completely alter the course of your retirement.

While it’s difficult to plan for all these possibilities, you can do your due diligence and set up aforementioned long-term care insurance, life insurance and possibly even a postnuptial agreement (one made after you are married) to protect your finances.

5. Social Security policy changes

Nearly 50 million Americans collect monthly retirement benefits from the Social Security Administration.

However, due in part to seismic demographic shifts spurred by the retirement of baby boomers, the SSA is on pace to become insolvent in the 2030s. High inflation now, which results in boosted monthly Social Security benefits in the short-term, could cause insolvency to come sooner.

While insolvency is a real possibility, and retirement benefits could be cut 20% or more, a hypothetical change to Social Security's payouts doesn’t top Hou’s ranking. At any time before then, Congress could, of course, act to keep retirement benefits fully funded.

“One big reason the policy risk is small is that Social Security reform is unlikely to have a significant impact on people who have already retired,” he wrote.

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