Four risks that can upend your retirement plan

At this week’s Morningstar Investment Conference in Chicago, three retirement experts addressed about 2,000 advisers and clients and identified four risks to retirement plans: market downturns, unexpected early retirement, rising long-term care costs and inflation.

Dana Anspach of Sensible Money recommended an income-ladder bond strategy that matches bond maturities to a retiree’s near-term spending needs. By buying bonds that mature when cash flows are required, advisers can create a predictable short-term income floor and reduce the need to sell stocks in a down market. Anspach said the approach helped her clients during 2022 and turned ‘a rough year in capital markets like 2022 into a nonevent.’

Michael Finke of The American College of Financial Services highlighted the risk of poor returns in the years just before and after retirement. He cited a study that found returns in the five years before retirement, and the first three to four years after, have the largest impact on how much income a retiree can sustainably draw. With cyclically adjusted price-earnings ratios in the low 40s, Finke warned the probability of lower-than-expected returns has risen. ‘I think the risk has never been higher that retirees are not going to get the returns that they hope to get,’ he said.

Anspach described unexpected early retirement as a common shock, noting clients in their late 50s or early 60s who lost jobs to outsourcing after planning to work to 65. She recommended that advisers stress-test plans using earlier retirement ages, such as 60 or 62, to assess how income and assets would hold up.

On inflation, Anspach said her firm plans for living expenses to rise about 3% a year and for healthcare costs to rise about 5% a year. Finke urged delaying Social Security claiming, especially for healthy, higher-income workers, calling delayed claiming ‘the single best way to hedge’ against inflation and longevity risk.

Christine Benz, director of personal finance and retirement planning at Morningstar, pointed to long-term care costs as a possible late-life shock that can disrupt finances. Anspach said advisers model a long-term care event, often placing it in a client’s early 80s, and test how long assets would last. That analysis informs whether to recommend long-term care insurance; the panel noted research showing people with coverage are more likely to receive quality care.

The panel described specific planning steps advisers can use: short-term bond ladders to protect near-term income, scenario testing for earlier-than-planned retirement, factoring higher medical-cost growth into projections, and reviewing Social Security claiming timing.