4 key risks to your retirement

Information Courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York

The picture of retirement for some may be traveling, spending time with family and old friends, or exploring new hobbies. Few people dream of retirement risks like unexpected illnesses or stock market volatility.

While you can't avoid some risks, you can prepare to respond and regroup if you're aware of the possibilities. Understanding which retirement risks may affect you is the first step to boosting your financial security.

Although there are many risks we face in retirement, they generally fall under four categories. Read on to learn more about the risks you may encounter in your retirement.

1. Longevity and health risks

Longevity risks

One of the biggest worries for those already retired or approaching retirement is running out of money. People are living longer, which means there's a risk they'll outlive their retirement savings.

One in three 65-year-olds today live to at least 90, and one in seven live to at least 95, according to the Social Security Administration.^{See note1} Even the best retirement calculator can't predict how long you'll live. Will your retirement income be enough?

Many folks have a hard time balancing their short-term retirement needs with the prospect of needing income later. That's why it's important to understand the tradeoffs between longevity versus liquidity.

Health risks

Unexpected medical expenses can drain your savings. Prescription drug costs continue to rise, and older adults often have greater health care needs.

Many retirees rely on Medicare and supplemental insurance, but both could leave you with unplanned out-of-pocket costs. Be sure you understand the basics of Medicare.

It's also important to consider the chance that you or your spouse will need long-term care. About 70% of Americans aged 65 or older will require some level of long-term care, according to the U.S. Department of Health and Human Services. Long-term care services can range from full-time residence in a skilled nursing facility to help at home with daily activities like bathing, preparing meals and household chores. Those costs can add up quickly.

Planning for some of these long-term care costs can help limit their impact on your retirement. You may be able to afford out-of-pocket expenses on your own. If not, consider long-term care insurance.

2. Personal risks

Excess debt can also impact your retirement budgeting. Many folks enter retirement with a mortgage or student loan debt from children or grandchildren. Lingering medical bills or costly home repairs could mean more debt that adds to your financial burden.

Many retirees also find themselves helping other family members with unexpected expenses, like paying college tuition for grandkids or short-term financial assistance to adult children.

Other personal retirement risks include the death of a spouse, which can have health and financial impacts. Grief contributes to depression and it can lead to a reduction in retirement benefits.

The age you retire can also carry some risks. If you take early retirement, you'll forfeit years of earning income and contributing to your 401(k).

Claiming your Social Security benefits too early is another common risk. In most cases you can start receiving your Social Security retirement benefit as early as age 62, but it will result in a lower monthly paycheck. The full retirement age for Social Security benefits — the age you can start receiving your full retirement benefit — is 66 if you were born from 1943 to 1954. If you were born from 1955 to 1960, it increases gradually until it reaches 67.

Whether you're married or single, don't underestimate the importance of your Social Security strategy.

3. Legislative and public policy risks

Laws, policies and guidelines are constantly changing. Updates to federal, state or private employer programs may affect your retirement benefits. These include changes to tax policy, Medicare benefits, Social Security programs, military retirement benefits, teacher retirement, 401(k) plans and IRA distributions.

Because these policies affect so many aspects of your life, don't assume that rates and retirement benefits will remain the same. Educate yourself on the benefits you're entitled to at the federal, state and local level. Build flexibility into your retirement plan.

4. Investment risks

Because many retirement accounts are tied to the financial markets, a shift in interest rates or stock performance could affect your wallet.

How your retirement investments perform in the first four or five years of your retirement is key and can be affected by market volatility. Even short-term fluctuations in the market can impact retirement funds. If there's a significant market drop at the start of your retirement, you could see the value of your investments shrink to a point that you experience long-term consequences, even if the markets improve.

Retirees might be able to reduce some effects of market risk with a pension or annuity. While these financial vehicles may have their own risk, they generally provide a buffer from the ups and downs of the markets.

The rate you draw down savings and investments to pay for your living expenses in retirement can also affect how long your retirement income lasts.

As you embark on the retirement planning journey, find an appropriate withdrawal or spending strategy to fit your savings and needs.

Manage risks with a plan.

The biggest risk to retirement is not having a plan. You can't foresee every unexpected expense, but you'll fare better if you have a strategy and potential solutions.

Understanding possible risks — and planning for them — can help keep your retirement dreams intact.

Your retirement plan should depend on your unique circumstances.