5 Risks to Your Retirement Portfolio You Need to Know About

By Chika


Last Updated: September 19, 2022



Having a well-built retirement portfolio and a robust income strategy does not insulate it from future risks.

Changes in the economy throw up unforeseen risks which could affect the value and performance of your portfolio. 

When you are younger, navigating, adjusting, and recovering from economic risks is less costly. However, when you are retired and have to depend on your retirement funds, the costs of adjusting could come at a steep price.

This is why it's important to have an idea of potential financial risks you could be facing when you are retired. 

Let's have a look at the post-retirement risks which could affect your portfolio.



5 Risks to Your Retirement Portfolio to Watch Out For

1. Longevity Risk

Advances in medicine and technology have had an impact on life expectancy within our society.

Today's retirees are living longer than ever before. Many people underestimate their life expectancy, which raises the possibility that they may outlive their possessions. Nobody, however, wants their retirement strategy to be hinged on an early death.

Married couples are in a more precarious situation.

They must think through a variety of challenges, such as how their lives will alter if one spouse outlives the other. How will the surviving spouse's income requirements and sources change? Strategies for lifetime income, insured solutions, and a prudent approach to asset allocation are approaches to mitigate this risk.

Depending on your spending flexibility and how much you rely on your portfolio for income, you may want to consider annuities that guarantee an income payment for as long as you live.

You could also do an 'estimate' of how long you would live by looking at the average life expectancy of your country or state. This would give you a benchmark to work with. 


2. Health Care Risk

Inflation on health care costs coupled with living longer in retirement can spell disaster if not properly managed.

Compounding this issue further is the rate of inflation on items such as prescription drugs and preventive care, which have historically exceeded the 3% general rate of inflation mentioned earlier. 

According to a 2022 Fidelity Investments study, a 65-year-old couple would need $315,000 to pay for medical expenses throughout retirement, not including long-term care expenses.

Genworth Financial’s 2021 Cost of Care survey revealed annual long-term care costs were up 4.65% to $54,000 for assisted living facilities and home health care, all the way up to $61,776.

Medicare and Medicaid are the usual go-to solutions, they aren't always sufficient to address a person's requirements.

Luckily the Inflation Reduction Act just signed into law by President Biden could lower healthcare costs for retirees. But it's best that you have a backup plan of your own, like having private insurance coverage and an emergency fund. 


3. Stock market fluctuation

The stock market has historically produced positive returns over the long term, but as you approach retirement, you risk your exposure to market volatility.

This may make avoiding equities a good strategy, but you could be selling yourself short. You have to keep in mind that retirement can last for decades and you may still need to focus on growth. 

Being too conservative may cause you to prematurely run out of money, while being too aggressive increases your exposure to market volatility and potential for losses. A viable solution in this scenario is having a diversified portfolio that still allows for growth without much risk exposure.

You can stay away from volatile stocks or sectors of the market to insulate your portfolio from market volatility.


4. Low-interest rates

The traditional approach to retirement investing is to allocate a higher portion of your portfolio to bonds to help reduce stock market risk.

However, such an approach may be counter-progressive in today’s low-rate environment, as bond investments may not generate sufficient income on their own.

As such, you might consider including equities and real assets, like commodities or real estate, as part of your retirement portfolio to help generate additional income.


5. Inflation

Inflation is the unseen taxman which eats up your income and savings without you realizing it - at least over the short term.

With inflation averaging 3% annually based on historical figures, the cost of retirement is likely to increase over time, which means that your lump-sum savings might not stretch as far as you thought. 

To hedge against inflation, you can consider investing a proportion of your retirement portfolio in equities and real assets. If you choose to purchase an annuity, you can opt for one that offers cost-of-living-adjusted payments to help counteract the risk of inflation.



Final word

The way we prepare for retirement has changed substantially in recent history. Gone are the days of relying solely on employer-provided pension plans and Social Security to fund retirement.

A sound retirement income plan may not have solutions for all of these potential issues and risks, but understanding what might stand in your way and taking action to mitigate their effects will be critical to the long-term sustainability of your plan.

Now more than ever, there is a greater reliance on personal savings and investments to supply the income needed in retirement. 

Photo by Greta Hoffman


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