Retirement Risks and How to Plan for Them

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

Comprehensive financial planning is key to a smooth transition into and through retirement. But the journey is rarely straightforward—various retirement risks can threaten your progress toward your goals. To create a robust retirement plan, it's essential to first understand these risks and learn how to manage them effectively. By doing so, you can help protect your retirement investments and enjoy your golden years with financial confidence. Let’s examine six risks and how to mitigate them.

1. Longevity risk

Outliving your retirement savings, also known as longevity risk, concerns many retirees as the average lifespan increases. In fact, our 2025 Planning and Progress Study reports that 51 percent of Americans believe they will outlive their savings.

And their concerns are understandable in today’s retirement landscape. With advancements in health care, 67 percent of men and 75 percent of women over the age of 70 are expected to live at least another 10 years¹.

While enjoying a long life and a fabulous retirement lifestyle is what most people hope for, it also means you need enough savings. Otherwise, you may not get to enjoy all that you worked for. You could find yourself struggling to pay for critical expenses. In the worst case, you might eventually need to quickly sell assets you’d rather keep.

On the other hand, you’re much more likely to live the retirement lifestyle you’ve hoped for without outliving your savings when you:

• Talk with a financial advisor to be clear about how much you can confidently spend—and consider guidelines like the 4 percent rule.
• Regularly check in on your investments and update your spending if needed.
• Develop and follow a holistic plan for your money.

2. Risks related to market volatility

When we’re scrolling through the news, it’s common to see headlines about market volatility. It’s no fun to watch the value of your 401(k)s and IRAs go down. This risk of stock market ups and downs is the risk of market volatility.

The market corrects—which means that it declines 10 percent or more from its recent closing high—fairly often. With 38 S&P 500 corrections since 1950, the market corrects once every 1.84 years. You can expect to see a lot of ups and downs during your retirement.

But there's no reason to get wrapped up in short-term turbulence if you have long-term savings goals and strategies. In fact, you can work with a financial advisor to stabilize your portfolio by:

• Investing for the long haul versus pulling money from investments when the market is down.
• Consistently putting money into the market while you’re working, an approach known as dollar cost averaging.
• Diversifying, or spreading your investments across multiple asset classes, sectors and investing styles.
• Occasionally rebalancing your portfolio, which is an investment technique to get your mix of assets back to their preset target.
• Keeping an emergency fund in high-yield savings accounts.
• Building cash value in a permanent life insurance policy so you can use it during a market downturn rather than selling investments at a loss².

Sequence of returns risk

When you’re working and saving up for retirement, you’re focused on the longer term and the average growth of your financial portfolio. Year-to-year fluctuations aren’t super important as long as the average works out to the amount you planned. But when you’re retired and the market takes a downturn, the exact timing of the dip and your retirement account withdrawals can make a big difference. If you must withdraw while your account is down, it can cost you a lot. The order or sequence of investment returns and your withdrawals can significantly impact a portfolio’s longevity and sustainability—and this is called sequence of returns risk.

During a downturn, you may want to pause withdrawing more than the required minimum from market-based accounts to allow time for them to potentially recover their value. Instead, you might pull money from other sources. For that reason, many financial advisors will recommend fixed-income investments and holding some cash. Another source of money can be the cash value of a permanent life insurance policy if you buy it far enough in advance of needing the funds.

Market-based investments are an important component of almost every retirement plan. But when you pair investments with other financial tools, you can minimize the risk of needing to sell at a bad time.

Interest rate risk

One of the tips above, diversifying, will also help minimize the hit from a related risk involving interest rates. This stems from the way that changing interest rates impact different types of savings and investments. Depending too much on one type of investment raises your interest rate risk.

3. Inflation and taxes

Things seem to get more expensive each year—from groceries to gasoline. Inflation risk is the concern that your retirement savings will lose purchasing power over time. When this happens, the money you save now may not go as far as you think later on. And starting with our very first paycheck, we see how taxes eat away at income. As you plan for retirement, keep in mind that even your Social Security income may be taxed at the federal and state levels.

It's a good idea to talk with an expert about planning ahead for taxes in retirement. You can take advantage of financial tools with different tax treatments, like Roth IRAs. And be sure to plan for inflation, or you’ll deplete your savings faster than anticipated. (If that happens, you’ll need to reduce your spending or find another source of income—and that’s probably not the retirement you’re aiming for.)

Your investments will likely maintain buying power into retirement when your portfolio outpaces inflation. High-yield stocks, equities and real estate investment trusts (REITs) can be powerful investment tools when you’re striving to beat inflation. On the other hand, conservative assets like traditional savings accounts, pension plans or bonds may not produce returns that help you maintain your purchasing power over the years.

4. Cost of health care

Health care may be your largest single expense in retirement, especially if you retire before age 65 and don’t yet qualify for Medicare. And once you are covered, remember that Medicare excludes most hearing, dental and vision expenses. Medicare Part D covers prescription drugs, but plans vary in terms of coverage and costs. You’ll still be on the hook for deductibles, copays and other costs—including premiums. Doctor visits alone may cost a few hundred dollars per month.

As you look ahead to your retirement years, be sure to factor in potential expenses for uncovered services and out-of-pocket costs. Health Savings Accounts, known as HSAs, can be a valuable tool for saving for health care expenses in retirement on a tax-advantaged basis. Try to invest in preventive care and maintain a healthy lifestyle now to help reduce health care costs over time.

5. Long-term care expenses

We’ve already talked about the need to plan for longevity. But it’s difficult to imagine ourselves at age 80 and with reduced health and fitness. But the reality is we may need care that isn’t covered by life insurance—and isn’t fully covered by Medicare. While you might not have to move into a nursing home right away, you might need to modify your house or have an aide come over to help.

Planning ahead for these long-term care costs isn’t fun, but that planning could help you make a better choice. Your Northwestern Mutual financial advisor can help you find the right financial tool to help you pay for care if you need it. That way, you may gain more control over the type of care you get and your provider. Your financial advisor might recommend:

• Long-term care insurance to help cover potential expenses.
• Accelerated death benefit riders on life insurance policies, which use the death benefit money to reimburse qualifying long-term care costs while you’re living.
• A hybrid policy that combines a whole life insurance policy with a long-term care add-on known as a rider.

6. Not having a plan for your legacy

If you hope to leave something behind for your loved ones, it’s important to make concrete plans toward that goal. That can include everything from making charitable donations to funding a portion of your grandchildren’s education.

Being intentional about your plans can make for a more comfortable retirement. Otherwise, you might not “live it up” or fully enjoy your retirement because you’re too concerned that you’ll have nothing left for your heirs. Good planning guided by a professional financial advisor can help you strike a better balance between enjoying your golden years and leaving a meaningful legacy.

Your advisor might point out that permanent life insurance can be a valuable resource. In addition to providing access to cash that can help supplement your retirement income, these policies also offer a lifetime death benefit³that can be the center of your legacy plan. The death benefit typically transfers tax-free to your heirs.

Partner with a financial advisor to limit the six risks

Stepping away from your career after working for decades can be a huge adjustment. One way to ease the transition is to be confident that your money will be there over the years. Your Northwestern Mutual financial advisor can talk over your strategy and help you mitigate the risks to your retirement plan. That way, you can prepare more confidently.

Your advisor may find opportunities and point out blind spots that would otherwise be overlooked. Together you can move toward the retirement you envision.

No investment strategy can assure a profit and does not protect against loss in declining markets.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.