Retirement Risks and Risk Reduction Workarounds: 403(b) Version
June 26, 2026
By Barbara O'Neill, CFP®, AFC® stuff
Financial risks exist throughout people’s lives from their first job through retirement. Examples: job instability risk during working years and longevity and long-term care risk for older adults. There are also risks that affect people of all ages. Think inflation risk, investment risk, and the risk of falling victim to a scam.
Decisions made during young adulthood and middle age often have long-lasting effects on someone’s quality of life decades later. For example, people who save for retirement in their 20s may accumulate significantly more wealth than those who wait until their 40s, even if later savers contribute larger amounts.
This post provides a description of 12 retirement risks, some of which have roots in decisions people make decades earlier. For each risk, risk reduction strategies (i.e., workarounds) are suggested. It also includes a Retirement Risk Reduction Planning Worksheet to prepare personalized plans and concludes with a summary of two research studies about retirement risks, three “need to know” facts, and six take-away action steps.
12 Retirement Risks
Longevity Risk
The risk that retirees will live longer than expected and outlive their savings. Studies have found it is older adults’ biggest fear. Longevity risk has become increasingly important as life expectancies have risen and many retirees spend 25 to 30 years or more in retirement. Inflation, market downturns, and unexpected medical expenses can accelerate the depletion of savings. Longevity risk is less of a concern for 403(b) plan participants with a pension and/or Social Security that provides guaranteed lifetime income.
Workarounds: Save more in a 403(b), IRA, or taxable account, work longer, delay Social Security to earn a higher benefit, control spending, and buy a low-cost annuity for additional guaranteed income.
Inflation Risk
The risk that inflation will erode the purchasing power of retirees’ savings throughout retirement. For retirees living on fixed incomes, inflation can be particularly challenging because expenses rise while income remains relatively unchanged. As a result, the same retirement income buys fewer goods and services. Example: As per the Rule of 72, 3% average inflation will double the cost of purchases in 24 years (e.g., age 60 to 84). Inflation also erodes the value of cash savings when its return fails to keep pace with rising prices.
Workarounds: Build a diversified investment portfolio that includes investments with growth potential, work longer, delay Social Security, budget for future increases in living expenses, and post-retirement employment.
Investment Risk
The risk that a retiree's investments will lose value and/or fail to generate sufficient returns to support future spending needs. Market declines, economic recessions, inflation, rising interest rates, and poor investment choices (including attempts at market timing) can reduce investment account values. Being too conservative also creates risk if investments fail to keep pace with taxes and inflation.
Workarounds: Build a diversified portfolio, review and rebalance portfolio periodically, buy well-diversified, low-expense investments such as index mutual funds and exchange-traded funds (ETFs), and invest some money for long-term growth to help combat inflation.
Sequence of Returns Risk
The risk that poor investment returns occur early in retirement when retirees start withdrawing money from their portfolios. Losses during the first years of retirement can significantly shorten the life of a portfolio because withdrawals reduce the amount of money remaining to recover when markets improve. This risk is especially important for retirees who rely heavily on investment assets to generate retirement income and is less of a risk for 403(b) plan participants with a pension that covers living expenses.
Workarounds: Delay retirement to “ride out” a market downturn and maintain a “buffer fund” (several years of living expenses that are not covered by guaranteed income sources) in cash assets to avoid selling investments during market downturns.
Tax Risks
The risk that taxes in retirement can be larger and more complicated than expected. New sources of income (e.g., pensions and Social Security), investment income, and required minimum distributions (RMDs) often push retirees into higher tax brackets than when they were working. In addition, there is always the risk (for Americans of any age) that tax laws could change resulting in higher tax rates and fewer tax write-offs.
Workarounds: Practice tax diversification from early career age by diversifying savings across tax-deferred, taxable, and tax-free (Roth) accounts (instead of just tax-deferred accounts), bunch itemized deductions periodically, and convert traditional accounts to Roth accounts before retirement or in lower-income years.
Physical Health Care Risk
The risk of incurring large medical bills and out-of-pocket expenses such as deductibles, copays, and coinsurance in later life. Medical expenses often rise with age and can become a major financial burden. Recent research by Fidelity found that a 65-year-old retiring in 2025 will need approximately $172,500 ($345,000 for a couple) to cover out-of-pocket medical expenses (excluding long-term care) in retirement.
Workarounds: Maintain good health habits throughout adulthood, stay physically active, eat a balanced diet, get regular checkups, manage chronic conditions, avoid smoking, consider health savings accounts (if eligible) before retirement, and review insurance plans annually.
Cognitive Decline Risk
The risk of a gradual reduction in mental abilities such as memory and decision-making. Cognitive decline, which can range from mild cognitive impairment to serious conditions like Alzheimer’s disease, may affect a person’s ability to manage finances, make informed choices, or perform daily tasks. In addition to its effects on financial management, there is also the cost. Example: memory care can cost $6,000 to $12,000 per month.
Workarounds: Combine healthy lifestyle habits, mental engagement, regular physical activity, socialization, and adequate sleep, according to health experts. Also, manage chronic conditions like high blood pressure and diabetes. These habits support brain health and may delay or reduce the severity of cognitive decline.
Long-Term Care (LTC) Risk
The risk of requiring care to perform basic activities of daily living such as eating, bathing, and toileting due to physical disabilities or cognitive decline. Care can be provided in a variety of settings (e.g., home, assisted living, nursing home). About 70% of people age 65+ will need LTC at some point in their lives. Expenses can be substantial and are typically not covered by Medicare or standard health insurance.
Workarounds: Purchase LTC insurance (e.g., hybrid life insurance and LTC policy), earmark existing savings to self-fund for LTC (e.g., $120,000 cost per year x 5 years = a $600,000 set aside), pay LTC expenses with guaranteed income sources (e.g., pension), and save money to afford to move into a continuing care retirement community (CCRC).
Withdrawal Rate Risk
The risk of withdrawing too much money too quickly (overspending), causing assets to run out during retirement, or the risk of not withdrawing enough money during retirement (underspending). As a result, under spenders unnecessarily reduce their quality of life rather than enjoying activities, experiences, and services they can comfortably afford. Withdrawal rate risk, therefore, includes two opposite but related dangers as retirees balance enjoying their money today while preserving enough for future needs.
Workarounds: Do regular reviews of household cash flow, adjust spending as needed, work with a financial advisor, and use a Monte Carlo calculator to determine the probability of not running out of money.
Scam Risk
The risk of becoming a scam victim. Scammers often target older adults with fake investments, high-pressure sales tactics, and promises of guaranteed returns. Financial losses can be devastating because retirees have a limited ability to recover. Common scams that target older adults are grandparent, lottery, romance, phishing (fraudulent emails) and smishing (fake text messages), and tech support scams where scammers claim there is a security problem on a victim's computer and offer to "fix" it for a fee or gain remote access to steal data.
Workarounds: Be skeptical of unsolicited contacts via phone, email, or text, never act under pressure, use strong passwords and two-factor authentication (e.g., texted codes or biometrics), and learn the warning signs of scams (e.g., requests for secrecy).
Family Risk
This risk includes the death of a spouse or divorce, both of which can dramatically change retirement finances. Household income may decline (e.g., reduced pension, loss of a Social Security check) while living expenses and taxes remain high or even increase. Family risk also includes providing financial help to adult children, grandchildren, or other relatives. Excessive family support can jeopardize retirees’ financial security.
Workarounds: Discuss finances openly with spouse, develop a survivor benefits plan for each spouse, maintain updated beneficiary designations and legal documents, establish boundaries for financial support to others, and document family loans in writing.
Spending Shocks Risk
The risk of large, often unexpected, expenses, which can occur at any age. For retirees, common spending shocks include major home repairs (e.g., a new roof), vehicle repairs or replacement, large medical and dental bills, and family emergencies such as unplanned caregiving. Without emergency savings, retirees may need to sell investments, take on debt, or go back to work.
Workarounds: Maintain an adequate emergency fund, purchase adequate insurance (e.g., property, health, long-term care), and create sinking funds for known future costs like property taxes or a new car.
Research Results
A study by the Center for Retirement Research (CRR) at Boston College explored the National Retirement Risk Index (NRRI), which measures the share of working age households that is at risk of being unable to maintain their pre-retirement standard of living in retirement. Similar to findings from previous NRRI studies, about half of today’s non-retired households will not have enough retirement income to continue their lifestyle, even if they work to age 65 and annuitize all their financial assets.
Another CRR study explored retirees’ objective and subjective perceptions of retirement risks. The biggest risk, ranked objectively, was longevity risk, followed by health and market risk. The biggest subjective risk was market risk with longevity and health risk ranked lower. Long-term care risk was underestimated.
Three (More) Things
- Policy risk: the risk of government policy changes (e.g., possible future cuts to Social Security).
- Pension reduction risk: the risk of smaller or suspended benefits if pension plans are underfunded.
- Forced retirement risk: the risk of retiring earlier than planned due to layoffs, caregiving, or health.
Six Smart Strategies
No. 1: Determine Your Retirement Risks — Use the worksheet to identify risks that could affect you and workarounds that you can use.
No. 2: Plan for Emergencies — Save 3 to 6 months’ expenses for unplanned expenses and consider a home equity line of credit (HELOC).
No. 3: Develop a Long-Term Care Plan — Identify options such as guaranteed income sources (e.g., pension) combined with some self-funding.
No. 4: Plan for Inflation — Apply an inflation rate (e.g., 3%) to projections for future expenses (e.g., insurance premiums, HOA fee).
No. 5: Plan Income Withdrawals — Use a sustainable strategy (e.g., withdrawing 3%-4% of assets) or use RMDs as a withdrawal plan.
No. 6: Consider Delaying Social Security — Claim later to increase monthly income, but consider heath, income needs, and life expectancy carefully.
In Summary
Financial management is complicated in later life with new issues like Social Security claiming and RMDs. There are also many retirement risks, noted above, and some risks overlap (e.g., market downturns and sequence of returns). Two key takeaways: a well-funded 403(b) can be a powerful financial resource in later life and there are dozens of strategies to plan ahead to reduce retirement risks.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.