Father and son talking about some risks to the father's income in retirement.

Retirement income risks and how to manage them

You’ve probably heard about risk in relation to saving for retirement. As you near and enter retirement, those risks change, and so does their impact on your retirement income.

You can’t eliminate risk, but you can prepare for it. Here are some common retirement income risks and tips for managing them.

Risk 1: Inflation

As prices go up, your money buys you less and less. Over 20 or 30 years, this really adds up, and can have a big impact on your retirement spending.

How inflation affects purchasing power

Current amountNumber of yearsFuture amount needed to buy the same goods/services

What you can do:

  • Remember that Social Security includes a Cost-Of-Living Adjustment (COLA). It’s typically not too big, but it can help.
  • Contribute more to your retirement savings so you have a bigger cushion to offset rising prices.
  • Contribute to a health savings account, if you’re still working.
  • Spread retirement savings across different types of investments to help balance risk with potential growth.
  • Consider financial products that give you guaranteed income plus a Cost-Of-Living Adjustment.

Risk 2: A longer life

Life expectancies in the U.S. are longer than ever before, which is great news. What’s tricky is saving enough for a longer retirement—and making sure you don’t outlive your savings.

What you can do:

  • Max out your contributions to a 401(k) or 403(b) plan or IRA while you’re still working. Consider making extra “catch-up” contributions if you’re eligible (check with your employer).
  • Consider an annuity or similar product that gives you guaranteed income for life.
  • Consider long-term care insurance to help you manage medical costs later in life.
  • Work with a financial professional to figure out how much and how often you can withdraw from savings in retirement.

Risk 3: Rising health care costs

Health care costs will likely take up more of your budget after you retire. Medicare helps, but there are several things it won’t cover—like copays and insurance deductibles, dental and vision care and long-term care.

What you can do:

  • Start a health care savings account, if you’re still working. (Keep in mind that once you sign up for Medicare, you can no longer contribute to an HSA).
  • See if your employer offers an early retiree insurance program.1 Or consider extending your coverage using COBRA (although this may cost extra and usually has a time limit).
  • Join your spouse’s employer-provided health care plan, if he or she is still employed. Veterans may qualify for coverage through the Veterans Benefits Administration.
  • Purchase individual insurance.1 Compare options at healthcare.gov.

Risk 4: Changes in the market

Ups and downs in the market can significantly affect your retirement savings, and as you get closer to retirement, your investments have less time to recover.

What you can do:

  • Double-check your mix of investment options. Investments are organized into groups called “asset classes” with different levels of risk.  Some financial professionals suggest you invest more in lower-risk asset classes as you near retirement, while still keeping some potential for growth.
  • Be careful how often and how much you take from savings. When you retire, you’ll go from saving money for retirement to pulling from your savings to pay for living expenses. Taking out a smaller amount will help you conserve.
  • Think about adding guaranteed income. Some products offer fixed, guaranteed income all through retirement to help you meet your basic needs.
  • If the market acts up, don’t panic. Emotional decision making is generally never a good idea when it comes to finances. Remember your ultimate goals and review your investments to see what’s really going on. Then plan what, if any, action you should take (ideally with the help of a financial professional). Here's some more information on market volatility.

Start planning today.

It’s important to plan ahead for the unexpected, but you don’t have to do it alone. Consider working with a financial professional to review your financial situation and help you manage retirement income risk.

Ready to get started?

  • Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.
  • Have a Principal retirement account from your employer? Log in to principal.com to access personalized planning, sign up for our quarterly newsletter and more. First time logging in? Get started here.
  • Interested in starting an individual retirement account (IRA) or consolidating other accounts into your existing one? Call 800-247-8000, ext. 2503 between 7 a.m. and 9 p.m. CT. Not familiar with IRAs? Here’s a refresher.
  • Got a financial professional? They can help you figure out your next steps. If you’d like to meet with one face-to-face, we’ll help you find one.

1 You can consider these options if you are younger than 65 and not yet eligible for Medicare.

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Asset allocation and diversification do not ensure a profit or protect against a loss.

Investing involves risk, including possible loss of principal.

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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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