Key Financial Risks in Retirement and How to Mitigate Them

Retirement financial resilience is a critical concern as unexpected expenses can significantly impact retirees' financial stability. A recent T. Rowe Price survey indicates that only 27% of retirees feel prepared to handle financial shocks in retirement. Common financial shocks include unanticipated healthcare costs not covered by Medicare or supplemental insurance, such as copayments and out-of-pocket expenses that can accumulate quickly. Additionally, long-term care expenses are typically not covered by Medicare or supplemental plans, necessitating careful evaluation and planning before retirement. Housing-related expenses also pose a substantial risk to retirement finances. Many retirees underestimate the costs and complexities involved in downsizing or relocating, including repair costs, moving expenses, and timing issues. Such expenses can force retirees to liquidate investments during unfavorable market conditions, further jeopardizing their financial security. Financial planners recommend building adaptability and flexibility into retirement plans. This includes maintaining a liquidity reserve to cover 12–24 months of living expenses, which can prevent the need to sell investments during market downturns. Regularly reviewing insurance coverage—including Medicare supplements, long-term care options, and umbrella liability policies—is crucial for anticipating potential financial gaps. Overall, proactive planning for healthcare and housing costs, alongside establishing a cash cushion, can enhance retirees' capacity to manage financial shocks. The goal is to create a retirement plan that allows for adjustments when unexpected events arise, thereby preserving financial security throughout retirement.