The Four Risks That Shape Retirement

Retirement planning is about much more than investment returns. Longevity, markets, health, and the decisions we make along the way are interconnected, and a change in one can quickly affect the others.

When you think about retirement planning, what comes to mind first? For most people, it’s some version of: Do I have enough money, and will it last? Those are important questions, but over the years, I’ve seen that a successful retirement rarely comes down to investment performance alone.

Life has a way of introducing variables that don’t fit neatly into a retirement projection.

A framework from Chris Heye, Ph.D., published in the Journal of Financial Planning, captures this particularly well. Rather than looking at retirement primarily through the lens of investment performance, he identifies four connected risks: longevity risk, market risk, health risk, and decision risk. What caught my attention is how closely this reflects what we see in real life. These risks don’t occur independently. They overlap, and sometimes a change in one can set off a chain reaction involving the others.

Longevity Risk: What If You Live Longer Than You Planned?

Living a long life is certainly not a bad outcome, but financially it creates an unusual planning challenge because none of us knows exactly how many years we’re planning for. Someone retiring at 65 may need their savings to support 20 years of retirement—or 30 or more. That means retirement planning isn’t simply about having enough money on the day you retire. It’s about creating an income strategy that has the flexibility to support you over a potentially long period of time.

This often becomes more tangible when I ask clients to think about their own families. If your parents or grandparents lived well into their 80s or 90s, a 30-year retirement suddenly doesn’t seem particularly far-fetched. And the longer retirement lasts, the more opportunities there are for inflation, healthcare expenses, market downturns, tax-law changes, and other unexpected events to affect the plan.

Market Risk: It’s Not Just Your Average Return

Market risk tends to get the most attention because it’s the one we can see every day. The market goes up, the market goes down, and the headlines tell us exactly how much. But for retirees, when those returns occur can matter just as much as the average return over time.

Imagine two people who retire with the same amount of money and ultimately earn similar average investment returns. One experiences a significant market decline during the first few years of retirement, while the other experiences that same decline much later. Their outcomes can be very different because the first retiree may be withdrawing money from a declining portfolio to pay living expenses. Selling investments after a downturn leaves fewer shares available to participate when the market eventually recovers.

Inflation adds another dimension to market risk. Even relatively modest inflation can meaningfully change what it costs to maintain your lifestyle over a retirement that lasts several decades. We can’t predict the next market downturn or know exactly what inflation will look like 10 or 20 years from now. The goal is to build enough flexibility into the plan that we don’t have to.

Health Risk: When Life Changes the Plan

Health may be one of the hardest retirement risks to plan for because both the timing and the cost can be unpredictable. More than 9 in 10 adults age 65 and older live with at least one chronic condition. But statistics only tell part of the story. A health event can affect much more than medical bills—it may change where you live, how much help you need, whether you can travel, or whether one spouse becomes a caregiver for the other.

I’ve seen this personally in my own family. My father experienced multiple strokes and ultimately spent 5½ years in assisted living. Fortunately, my parents had purchased long-term care insurance years earlier, and that policy eventually paid more than $450,000 toward his care. When they bought the policy, they had no idea whether they would ever need it. Years later, it became an important part of protecting the financial resources they had spent a lifetime building.

That experience reinforced something I talk about frequently with clients: planning for health risk isn’t about predicting exactly what will happen. It’s about thinking through how the financial plan would respond if something happened. Where would the money come from? Would additional care require larger portfolio withdrawals? Would one spouse need to make financial decisions while also serving as a caregiver? Thinking through those possibilities ahead of time can be very different from trying to solve them in the middle of a crisis.

Decision Risk: The Risk We Talk About Less

Decision risk may be the least familiar of the four, but I think it’s one of the most important. Retirement isn’t one big financial decision that you make at 65 and then you’re finished. It’s a series of decisions made over many years: when to claim Social Security, whether to do Roth conversions, how much to withdraw from the portfolio, whether to help children financially, how to react during a market downturn, and eventually, whether it still makes sense to manage everything yourself.

Early in retirement, those decisions may feel relatively easy. But retirement can last decades, and our ability—or willingness—to manage increasingly complicated financial decisions can change. Estimates suggest roughly 14% of adults over 65 have dementia, with another 15% experiencing mild cognitive impairment. Heye’s framework also suggests households affected by cognitive decline may experience meaningful decreases in net worth in the years before a formal diagnosis.

I’ve also worked with retirees and widows who suddenly find themselves responsible for financial decisions that a spouse handled for decades. Even without cognitive impairment, the combination of grief, unfamiliar financial responsibilities, and major decisions can be overwhelming. Planning ahead may mean simplifying accounts, keeping estate documents and powers of attorney current, involving a trusted family member when appropriate, or having an advisor who already understands the financial picture before a crisis occurs.

When One Risk Affects the Others

This is where I think the four-risk framework becomes especially useful. Imagine a couple who retires with a healthy portfolio and a comfortable income plan. Several years into retirement, one spouse develops a health condition that requires additional care. Their monthly expenses increase, requiring larger portfolio withdrawals just as the market experiences a downturn. If they also live well into their 90s, those higher withdrawals may need to be sustained for many more years. Eventually, one spouse may be left making increasingly complicated financial and healthcare decisions alone.

What started as health risk has now affected market risk, longevity risk, and decision risk. That’s why looking at any one of these risks in isolation can miss an important part of the retirement picture.

Planning for Retirement as a Whole

This framework is a good reminder of why retirement planning needs to go beyond asking, What rate of return do I need? Investments certainly matter, but so do retirement income, taxes, Social Security, healthcare, long-term care, estate planning, spending decisions, family dynamics, and having a process for adjusting when circumstances change.

We can’t eliminate all four risks, and we can’t know which one will show up first.

What we can do is build a plan that recognizes the risks exist and has enough flexibility to respond when life doesn’t unfold exactly as expected.

The four risks are connected, and your retirement planning should account for those connections.

How Birch Street Can Help

At Birch Street Financial Advisors, we look at retirement as more than an investment portfolio. We help clients coordinate investments, retirement income, taxes, Social Security, healthcare considerations, long-term care planning, and estate strategies so that decisions aren’t being made in isolation.

Just as importantly, we continue revisiting the plan as life changes. Retirement planning isn’t something you finish the day you retire; it’s an ongoing process of making thoughtful decisions throughout the years that follow.