5 Ways To Mitigate Risk as You Plan Financially for Retirement
Written by
Laura Bogart
Edited by
Kristen Mae
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Retirement is often romanticized as one of the most pleasurable, leisurely times in life. After all, who doesn’t love the idea of clocking out for the last time and living your golden years on your own terms? That’s why so many people put time and care into retirement planning.
But retirement planning isn’t just about ensuring you have enough money for travel or keeping the grandkids in “just because” gifts. It’s also about mitigating the financial risks you could face once you’re no longer drawing a paycheck.
To help you get a head start on smart planning, GOBankingRates talked to financial experts about how you can avoid the financial toll of some common risks.
1. Make Sure You Don’t Outlast Your Money
For D’Andre Clayton, co-founder of Clayton Financial Solutions, retirement risk isn’t one thing — it’s a pile-on of events. However, one of the biggest risks he sees is longevity risk, or the possibility that you could outlive your money.
Several factors can cause you to outlast your savings. As Clayton explains, sequence-of-returns risk means a bad market early in retirement can kneecap decades of good planning. There’s also the impact of inflation, rising health care costs, and the Income-Related Monthly Adjustment Amount (IRMAA) surcharge added to monthly premiums for Medicare Part B and Part D for high-income beneficiaries — which, he says, can “turn tax brackets into tripwires.”
Clayton added that the biggest risk is human behavior — selling low in panic or chasing hot stocks without a plan in place.
“My fix is simple and easy to do. Engineer cash flow first, optimize returns second. Build a floor you can’t outlive — Social Security, pension and a slice of savings converted to guaranteed lifetime income,” he said. “Keep 12 to 24 months of essentials in cash so a market dip doesn’t force a bad sale. Segment the rest by time: near-term income assets and long-term growth for inflation.”
2. Focus on Steady Income
Clayton understands the appeal of earning big market gains quickly, but he wants retirees to focus on securing steady income first. Building a stable financial foundation enables you to balance safety and growth — if your cash flow is strong and your needs are met, you can afford to experiment with higher-risk, higher-reward investments.
“If you prioritize cash flow first, you will always have money to chase after high returns if you need that thrill with the money you are guaranteed,” he said. “For some reason, advisors make it an either/or scenario. If I wanted to hit it big with Bitcoin, trust me, it’s a lot better to be more aggressive when you know you’re guaranteed to make $40,000 next year and every year.”
3. Adjust Your Withdrawals to Market Conditions
According to Clayton, retirees should let their withdrawals “breathe” with the market — in other words, adjust withdrawals to market conditions.
Here’s how this might play out for the average retiree:
- When your investments do well, you can take out a bit more — or, as Clayton calls it, “give yourself a raise.”
- When the market drops, you should freeze or trim withdrawals by about 5% to 10% to give your portfolio time to recover.
“Meanwhile, defuse the tax bomb with planned Roth conversions before RMDs — and watch the IRMAA cliffs while you’re at it,” he said. “Keep liquidity on call; a standby HELOC or reverse-mortgage line is a fire extinguisher you hope never to use.”
4. Make Sure You Have the Right Insurance
As people live longer, they have more health care needs — and higher health care costs in retirement.
According to Shalini Dharna, CPA, CA, of Dharna CPA, retirees can avoid being mired in health care costs by purchasing the right health insurance coverage earlier in life.
She also recommends exploring how life insurance can help defray other health-related costs.
“A universal life or whole life insurance policy with a cash value you can potentially borrow against can provide flexibility,” she said.
However, she cautions that these policies are more complex and can carry higher costs, so they should be explored in detail — preferably with a financial advisor.
5. Find Ways To Cut Your Expenses
Dharna also advises finding ways to cut expenses to free up funds in retirement. Making some choices now can give you more money for an emergency fund or investments that help grow your nest egg.
Some common ways to trim expenses before retirement include:
- Downsizing your home
- Installing energy-efficient features
- Trading your car for a smaller or more fuel-efficient model
- Cooking at home more often
- Using senior discounts whenever possible
- Choosing generic prescriptions when appropriate
- Canceling unused subscriptions
- Switching to a cheaper phone or internet provider
Reviewing your budget with a trusted advisor can help you identify the best ways to cut expenses without sacrificing comfort or quality of life.
The Bottom Line
Retirement can be a wonderful season of life — though it’s not without financial risks. To mitigate those risks, work with an advisor to ensure you don’t outlast your money, focus on steady income, develop a smart withdrawal strategy, secure proper insurance, and trim unnecessary expenses.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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