3 Signs Your Retirement Is Already in Trouble — Even If Your Account Looks Fine

People save money for several decades before retiring, but your job isn’t over once you walk away from your career. It’s essential to monitor your nest egg and make sure it aligns with your long-term financial goals.

While putting everything in stocks is risky, there are other costly blunders that some retirement savers overlook. These are three red flags to look for in your portfolio.

1. More inflation exposure than you realize

Inflation eats away at the purchasing power of idle cash. It’s something retirees need to be especially careful of since they’re losing their paychecks at a time when they may need to spend more on health care, which rises in cost especially quickly.

While the typical inflation rate is around 2% to 3%, some years see especially high inflation. In 2022, for instance, inflation jumped as high as 9%. Retirees should run the numbers and test if their income can keep up with inflation. If you have never stress-tested your portfolio against inflation, now is a good time to do so. That way, you won’t be caught by surprise if inflation soars unexpectedly.

2. Too much reliance on one income source

Putting all of your eggs in one basket is a risky proposition, especially when you are retired. Social Security, a pension and an investment account can make sense as a team, but leaning exclusively on one of those income sources leaves you vulnerable. Stocks can lose value, and while pensions are stable and Social Security gradually goes up, inflation can still erode their purchasing power.

Diversifying into stocks, bonds, Social Security, investment income and alternative assets minimizes your risk. Dividend stocks can supplement Social Security benefits, and alternative assets can act as valuable hedges against inflation.

3. Sequence of returns risk is unaddressed

The stock market has a long history of outperforming inflation and delivering long-term returns for patient investors. While it can be easier to weather corrections in your 20s, it becomes more difficult when you retire due to the sequence of returns risk.

This risk reflects the fact that retirees need to withdraw from their portfolios to cover living expenses regardless of whether the S&P 500 is up by 10% or down by 30% in a single year. A notable correction in your first or second year of retirement can force you to sell more shares to cover your living expenses. Fewer shares means you won’t have as much exposure to a stock market recovery, and it can throw a wrench in your long-term retirement plans.

Investors can get around the sequence of returns risk by having enough cash to cover at least a year of living expenses. You can put this money into a high-yield savings account so it grows over time. You can also save a bit more and use a certificate of deposit (CD) ladder to help the money grow.

You should establish a withdrawal strategy for the first five years of retirement. While you can trim some equity positions, it often makes sense to keep stocks that you won’t need to sell for multiple years. Stocks are one of the growth-oriented assets in a retiree’s portfolio, and it’s important to have those types of assets instead of exclusively relying on cash and bonds.