Mountaineers who fail to identify and effectively mitigate specific risks often become valuable examples for more studious climbers. Just as hypothermia, personal injuries, white-outs, slip-and-falls, avalanches, and crevasse falls threaten the mountaineering expedition, the following hazards endanger an equally challenging endeavor, the Retirement Income Plan. Identify and mitigate the following risks to help improve the sustainability of your retirement income and lifestyle:
- Market Risk
Market fluctuations can significantly impact retirement portfolios, especially for those relying on investments to generate income. A major downturn can erode account balances just as retirees begin withdrawing funds. Diversification across asset classes and maintaining an appropriate mix of growth and defensive investments may help mitigate this risk.
- Interest Rate Risk
Interest rate movements affect both bond values and the income retirees can earn from fixed-income investments. Rising rates can reduce the market value of existing bonds, while prolonged low rates can make it difficult to generate sufficient income safely. A laddered bond strategy or a mix of short- and intermediate-term instruments can provide balance and flexibility.
- Sequence of Returns Risk
The order in which investment returns occur matters greatly in retirement. Experiencing negative returns early—while taking withdrawals—can permanently damage a portfolio’s longevity. Managing withdrawals strategically, holding a cash reserve, and using income “buckets” or guaranteed income sources can help offset this timing risk.
- Inflation Risk
Even modest inflation erodes purchasing power over time. A dollar today won’t buy as much 20 years from now. Including assets that tend to outpace inflation—such as equities, real estate, or inflation-protected securities—coupled with a delay in Social Security benefits can help maintain the real value of income over time.
- Long-Term Care Risk
The potential cost of extended care late in life poses one of the most significant threats to retirement security. Whether provided in-home or in a facility, long-term care expenses can quickly deplete savings. Options like long-term care insurance, hybrid life/LTC policies, or setting aside dedicated assets can provide protection.
- Income Tax Risk
Future tax policy is uncertain. Rising federal or state taxes could reduce net retirement income, particularly from taxable accounts or required distributions. Proactive tax diversification—using a mix of taxable, tax-deferred, and tax-free accounts—offers flexibility to manage withdrawals efficiently under changing tax regimes.
The Bottom Line
A successful retirement plan isn’t just about growth—it’s about managing financial risks, much the way an accomplished climber manages mountain perils. By addressing these key threats with thoughtful diversification, flexible withdrawal strategies, and prudent contingency planning, retirees may increase their confidence that their income will endure as long as they do. Think about it and may God bless your planning efforts, Shaun.
“The prudent sees danger and hides himself, but the simple go on and suffer for it”. ~Proverbs 22:3
“Where there’s no guidance a person falls, but in an abundance of counselors there is safety”. ~Proverbs 11:14
Disclosure(s)
The information provided herein is for education purposes only and should not be construed as personalized investment, tax, or legal advice. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Any strategies discussed may not be suitable for all investors and should be considered in the context of an individual’s financial circumstances and objectives.
Old Forge Wealth Management, LLC (“OFWM”) is a registered investment adviser located in Rhode Island. Registration does not imply a certain level of skill or training.
Examples and opinions expressed are full illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any security. All information is believe to be accurate at the time of publication but may change without notice.