Discover the critical factors that can jeopardize your financial security in retirement, from unexpected longevity to complex tax burdens, and learn how to navigate them.

By Wei Hu

Most people would probably agree that it’s easier to spend money than save money. But when it comes to your retirement nest egg, spending those savings wisely is not such a simple proposition.

To be sure, the financial industry spends a lot of time helping people during the accumulation phase. Yet, after years of working hard to build a sufficient portfolio, many investors are often left wondering how to make those funds last, which to draw on first, when to claim Social Security and how to minimize their taxes – to name just a few of the challenging decisions.

The reality is that even the most well-prepared aren’t immune to financial hiccups once they transition into the spending phase. This also reinforces why having professional guidance during retirement is just as important as having it when you’re saving up.

It’s also important to understand the factors that could put your financial security in retirement at risk. Here are five to put on your radar.

1. Longevity

We tend to think of longevity as a good thing. A longer life means more time to spend with the people we love and the things we enjoy doing.

But longevity, and the uncertainty around it, can also pose a real risk. How long you live will impact how far your savings needs to last and how much you can afford to spend each year. It can also influence key financial decisions, such as when to claim Social Security.

In 2023, life expectancy at birth was 78.4 years for the total U.S. population—an increase of 0.9 years from 77.5 in 2022. There’s inevitably a portion of the population that will live well beyond these averages and you can’t assume you won’t be part of it. In fact, just reaching retirement age means you’ve beaten the odds. For men and women who have reached age 65, their life expectancies are 88 and 89, respectively.

Placing bets on your lifespan is not a sound strategy. Your financial plan needs room to flex and adjust, and it should be prepared for multiple age scenarios. Working with a professional can help you think through these options instead of going at it alone and potentially miscalculating or overlooking the issue.

2. Taxes

While many people are used to payroll taxes and capital gains taxes, retirement introduces a new world of potential tax issues.

First, those payroll and capital gains taxes may not go away. If you opt to work part-time, which could be good for your finances as well as mental health, you’ll owe the IRS a portion of your income. Gains on investments outside of a Roth account will incur some type of tax bill, too. And non-Roth accounts open the door to required minimum distributions, which can create their own unique tax headaches.

Then there are Social Security taxes, which can be extremely complicated. They’re based on a formula that accounts for your adjusted gross income, earnings from non-taxable interest and half of your Social Security benefits themselves. But depending on your earnings, your effective tax rate on Social Security benefits could be quite high.

Taxes also tie into the issue of Medicare costs. High-income seniors face surcharges on premiums based on earnings, which can make budgeting for healthcare expenses tricky. There is good news, though – these issues create opportunities to withdraw from accounts in a smart way to minimize the tax hit.

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3. Sequence risk

Retiring at a time when the stock market is down is a common fear for many people. That’s because the impact of taking withdrawals from your portfolio during a market downturn can have long-term consequences.

If you continue to tap your portfolio at a time when it’s lost value, you are likely withdrawing a higher percentage of your portfolio. Not only does that put you at risk of depleting your nest egg more quickly, but it also leaves you with fewer assets in your portfolio to generate growth.

There are, however, ways to manage this sequence risk, such as having one to two years’ worth of living expenses in cash to minimize portfolio withdrawals and being flexible with your spending and lifestyle.

Working in retirement may not be something you’re drawn to naturally. But in a down market, income from a part-time job represents money you don’t need to withdraw from a stock portfolio whose value has just declined.

4. Inflation

In recent years, working Americans and retirees alike have seen inflation squeeze their budgets. But even in a far more subdued form, inflation can erode your nest egg in the absence of the right investments.

Your goal during your wealth-building years as well as your retirement years, should be to invest in a manner that can outpace inflation without taking on undue risk. During your working years, you get more leeway, since you’re not immediately tapping your portfolio for income. In retirement, the right mix of stable assets and stocks could allow your portfolio to grow above the rate of inflation, allowing you to maintain your buying power from year to year.

The right Social Security strategy could also be a hedge against inflation. Delaying benefits past full retirement age, which is 67 for anyone born in 1960 or later, results in an annual 8% boost up until the age of 70.

A delayed claim isn’t right for everyone, and there’s the risk of ending up with less lifetime Social Security income if you don’t live as long as the average person. But the larger your benefits are, the more built-in inflation protection you get. And your spouse might also benefit from these higher benefits for the remainder of their lives too.

Not only are you guaranteed more monthly income, but also, benefits are adjusted annually for inflation. The higher your base, the larger an adjustment you get year after year.

5. Health Care

In 2020, national per capita personal health care spending for people 65 and older was $22,356, five times higher than spending per child ($4,217) and more than double adults younger than 65 ($9,154). Other estimates are substantially higher. And as we all know, averages don’t apply to everyone.

Of course, health care costs tie into longevity. The longer you live, the longer you’ll pay Medicare premiums and the more expenses you’re likely to face, in general.

Long-term care is a health-related cost to factor in, too. One-third of today’s 65 year-olds may never need long-term care support but 20% will need it for more than five years.

It’s hard to know which end of the spectrum you’ll land in, and long-term care insurance isn’t always cost-effective. Your retirement plan needs flexibility to account for unexpected healthcare costs.

Get help building a plan that works for you. Even if you retire with a comfortable amount, there’s the risk of not meeting your retirement goals the way you’ve envisioned them. That’s why the most important elements of your retirement plan are personalization and adaptability.

As markets alter the value of your portfolio and various costs arise, prepare to adjust your spending. And as tax laws evolve, be ready to pivot and tap your various accounts strategically. Partnering with a trusted adviser can help you navigate these and other risks retirees commonly face so that your later years are as rewarding as you want them to be.

About the author: Wei Hu

With more than 30 years of experience, Wei helps lead a team of financial researchers and portfolio strategists who work on stimulating problems that also have a real-world impact on people’s lives. Their responsibilities include the development of the analytical models that generate Edelman Financial Engines recommendations and forecasts, as well as the design of new advice and planning services. Wei and his team focus on designing solutions to financial problems while teaching our planners and clients about why those are good approaches and developing ways to coach clients away from emotion-based decisions that can negatively affect them.

Wei joined Edelman Financial Engines in 2000 and has expertise in asset pricing, capital markets, taxation, and retirement economics. Previously, he was an assistant professor at UCLA, teaching undergraduates and PhD students in the field of public finance. His courses covered topics related to retirement economics, such as the interaction of Social Security, taxes and retirement and savings decisions. Wei appreciates the opportunity to feel a real-world immediacy with his work at EFE – something that was harder to experience in academia – and feels EFE is in an amazing niche within the industry of financial services where our main goal is to help people to help move their financial lives forward.