Are You Getting Retirement Risk Wrong?

What’s the biggest risk to your retirement security? Chances are, it’s not what you think.

Recent research found that retirees rank stock market volatility as the largest threat to their finances. In reality, you’re most likely to face fiscal challenges in retirement due to living longer than anticipated and outlasting your money, according to a July 2022 study from the Center for Retirement Research at Boston College.

The second biggest financial risk for retirees is health care costs, particularly for unexpected medical issues and long-term care, the center found. “Out-of-pocket expenses rise quickly with age, and health costs in retirement have increased substantially over the past few decades,” the report says.

Investment risk — the chances that a volatile market will reduce the value of our IRAs and 401(k)s and leave us high and dry — ranked third among real-world financial threats to retirees. Perceptions notwithstanding, market fluctuations pose less of a threat “thanks to retirees’ relatively long —about 20 years —investment horizon,” the study notes.

Market issues ‘top of mind’

“It is not surprising that stock market risk is overestimated, considering the news headlines in our life, especially what happened in the market during the past two years,” says Wenliang Hou, a quantitative analyst at Fidelity Investments and the study’s author.

“For a normal person who is not an expert in finance, it is very easy to follow the media and overstate the market volatility,” he says.

Behavioral economist Tom Chang agrees, noting that “things that are easy to access and talked about tend to dominate people’s thinking.”

“We call it ‘salience,’ ” says Chang, an associate professor of finance and business economics at the University of Southern California. “People tune in to the news or listen to TV, and then they hear about a market crash. Because it’s constantly in the news and what people talk about, it’s top of mind.”

At the same time, most of us don’t like to think about illness and death, and “if you don’t like to think about those things, you’re not going to spend time planning for them,” he adds. “As a way of pain avoidance, we tell ourselves, I’ll just figure it out later. But then it never really gets done.”

Chang says this type of emotion-driven decision-making (or non-decision-making) can impede not just financial planning for retirement but also making important medical and legal arrangements, such as writing wills and end-of-life directives.

4 ways to hedge against retirement risks

Rather than letting short-term market fluctuations dictate your long-term strategy, retirement pros advise focusing on things you can control. With that in mind, here are four money moves to consider if you’re looking for additional income streams and a measure of protection against outliving your money.