How Inflation and Risk Impact Retirement Income

What are the four biggest risks to retirement income?

Most retirement income challenges fall into one of these four categories:

Let’s break down each.

1. Longevity risk

One of the biggest threats to your retirement income plan isn’t market downturns; it’s living a long time. This is known as longevity risk.

For example, a 65-year-old man can expect to live 18.2 more years on average, and a 65-year-old woman can expect to live 20.7 more years.¹ Living longer gives you more time to spend with loved ones, volunteer, pursue hobbies you’re passionate about, travel, and enjoy retirement.

However, nearly 1 in 3 adults is unsure if they’ll outlive their retirement assets. One way to address longevity risk is by incorporating sources of guaranteed lifetime income into your plan. Depending on your situation, this could include Social Security, life insurance, or an annuity.

Investments can help you grow your assets over time, but guaranteed income sources can help provide a baseline level of income regardless of how long your retirement lasts.

2. Inflation risk

New York Life’s Wealth Watch survey found that 63% of adults are concerned about the higher cost of living and 55% are worried about the rising cost of everyday expenses.

The reality is, inflation can affect everything from groceries and utilities to housing, healthcare, and travel. Even if it’s 3% on average, it can cut your purchasing power in half over 24 years. In other words, something that costs $50,000 per year today could cost nearly $100,000 per year two decades from now.

To help address inflation risk, retirees need a well-rounded retirement income strategy. Depending on your situation, this could include: 

• Social Security, which includes cost-of-living adjustments to help your benefits keep pace with rising prices.
• Investments situated for long-term growth that outpaces inflation over time.
• Income annuities or other guaranteed income strategies, some of which offer features designed to help income grow over time or keep pace with rising expenses.

Did you know?

Inflation tends to go hand in hand with longevity risk. The longer you live, the more you could expect inflation to rise. That’s why retirement income planning should account not only for how much income you need today, but how your income needs may change over the many decades ahead.

3. Sequence-of-returns risk

Sequence-of-returns risk is the idea that market losses early in retirement can have a much larger impact than identical losses later in retirement. And this is another major risk to be aware of in retirement.

Consider two retirees who each retire with $2.5 million and withdraw $100,000 annually for living expenses. In their first year of retirement:

• Retiree A experiences a 20% market decline, reducing their portfolio to roughly $1.9 million after withdrawals.
• Retiree B experiences that same 20% decline 15 years later, after years of portfolio growth.

Even if both retirees earn the same average return over their lifetimes, Retiree A may end up with substantially less money because early losses and ongoing withdrawals make it harder for their portfolio to recover. Meanwhile, Retiree B’s portfolio had more time to grow before the downturn.

So, how do you plan for sequence-of-returns risk? One common strategy is to create a guaranteed income floor.

With a guaranteed income floor, you cover essential expenses such as housing, food, utilities, and basic healthcare with reliable income sources like Social Security and, in some cases, insurance-based income solutions. That way, you reduce the need to sell investments during market downturns to fund everyday living expenses.

4. Healthcare cost risk

Only 45% of people account for healthcare and long-term expenses in their retirement planning, according to New York Life’s Wealth Watch survey. This number doesn’t even include unexpected medical expenses. Yet, the average 65-year-old may need approximately $135,000 to cover long-term care costs alone in retirement.²

These expenses can quickly add pressure to your retirement income plan, especially if you need care for several years. New York Life’s Cost of Care analysis found that 70% of people age 65 and older will need some type of long-term care in their lives, with the median cost of a private room in a nursing home being $135,528 per year.³

Without a plan in place, you could find yourself needing to make larger withdrawals than anticipated, which could increase the risk of outliving your savings.

Budgeting helps you manage retirement risk

No matter what risks your plan may face, a retirement budget can help you figure out how much you can comfortably spend, and where that income should come from.

For example, many financial professionals recommend covering essential expenses with reliable income sources, such as Social Security and other forms of guaranteed income, and using investment assets to support discretionary spending and long-term growth goals.

Creating a budget now can help you stress-test your retirement income strategy and make adjustments as necessary. Plus, if inflation rises, markets decline, or unexpected expenses occur, you’ll have a clearer understanding of which spending categories can be temporarily paused, and which ones must remain protected.

Frequently asked questions