Post-Retirement Risk

Post-retirement risk are the potential risks to financial security that a retired individual could encounter. Post-retirement risks can result in unexpected costs or lower income, which can jeopardize even the best-laid retirement plans.

Most discussion concerning planning for retirement is concentrated on the need to accumulate savings to provide income when paid employment comes to an end. The Society of Actuaries in the United States identified the following post-retirement risks:

"Outliving assets: At age 65, average life expectancy is 20 years for American men and 22 years for American women.Half of the population will live longer than life expectancy. There is a need to help Americans understand that they may live longer than they expect and that planning horizons are often shorter than life expectancy.

Loss of spouse: Women tend to live longer than their spouses. Periods of widowhood of 15 years or more are common. Women who are widowed often experience a drop in income and standard of living. Women need to be aware of the strong possibility of widowhood and the resulting impact.

Health care and medical expenses: Medical costs during retirement are expected to be $260,000  on average for a couple both age 65. Premiums are a significant drain on the income of average American seniors. Medicare Part B and D premiums, supplemental insurance premiums, dental and drug costs, and the costs of uncovered care all add up. Premiums are expected, but large dental and uncovered expenses are often not considered.

Decline in functional status: The cost of care for older, frail people can amount to $1 million or more for a couple over their lifetimes, if both need paid care. Nursing home costs vary but can exceed $80,000 per person per year.

Inflation: Most expenses increase during retirement, and medical costs increase more rapidly than general inflation. While Social Security income increases with inflation, other income often does not. Pre-retirement planning that allows for the impact of inflation on savings needs helps address this.

Economic risks: Investment returns are variable and are influenced by both interest rates and stock market returns. Interest rates affect returns on bank accounts, some investments and annuities. The low rates in the last decade have been a plus and a minus; borrowing costs dropped but so did returns on many investments. Stock market returns have been higher on average, but good and bad years also occur. Unexpected financial shocks in the economy can lead to difficult decision making.

Family risk: Family members, including parents, sick or unemployed adult children, and grandchildren, may need financial help or personal care or support.

Public policy risk: The possibility always exists that taxes, Social Security, Medicare benefits, Medicare premiums, and other benefits will be changed. Since most current and future retirees will depend on these benefits to secure their retirement, the risk of changes in these programs is major, as the changes may adversely affect retirement security."