Three Things to Watch Out For When Preparing for Retirement

Most retirement planning conversations start with a number. How much do you need saved. What rate of return should you expect. When can you afford to stop working. Those are reasonable questions, but they miss three risks that don’t show up on a simple savings projection, and each one can quietly undo an otherwise solid plan.

None of these are exotic. You won’t need a crystal ball to understand them. But they’re each easy to underestimate until you’ve seen what they actually do to a retirement plan in practice.

1. Sequence of Return Risk

Most people understand that markets go up and down over time, and that a long-term average return is what matters. That’s true while you’re still working and adding money to your accounts every year. It stops being true the moment you start withdrawing from those accounts instead.

Here’s the problem. Two retirees can have the exact same average return over a 25-year retirement and end up in completely different financial positions, depending purely on the order those returns showed up in. If the market drops hard in the first few years of retirement, and you’re pulling money out at the same time, you’re selling more shares to generate the same income, which leaves fewer shares left to recover when the market eventually turns around. Run those same average returns in reverse order, with the bad years coming late in retirement instead of early, and the outcome looks nothing like the first scenario, even though the average return was identical both times.

This is what people mean by sequence of return risk, and it’s one of the most counterintuitive things in retirement planning. The average doesn’t protect you. The order does.

Consider two hypothetical retirees, Joe and Jill. Both retire with $500,000, and both withdraw 4% in year one, increasing that dollar amount by 3% each year after to keep pace with inflation. Over the next 20 years, both experience the exact same 20 annual returns, averaging 5.4% a year. The only difference is the order those returns arrive in. Joe gets the down years first. Jill gets them last.

By year 20, Joe’s portfolio has fallen to roughly $263,000. Jill’s has grown to roughly $504,000. Same starting balance, same withdrawals, same average return, same 20 numbers, just arranged in the opposite order, and the two of them end up in entirely different financial positions.

Hypothetical example for illustrative purposes only. Assumes a $500,000 starting balance, a 4% initial withdrawal rate adjusted 3% annually for inflation, and the same sequence of 20 annual returns applied in opposite order. Not representative of any actual investment or client outcome.

The retirees most exposed to this are the ones who retire right before or during a market downturn, simply because of when they happened to stop working, not because of anything they did wrong. That’s part of what makes it frustrating. You can do everything right for 30 years and still get dealt a difficult hand depending on when your retirement date happens to land relative to the market cycle.

There are ways to manage this risk, and they generally involve reducing how much you’re forced to sell during a downturn. That might mean keeping a cash reserve or bond ladder that can cover a few years of expenses without touching your equity portfolio during a bad stretch. It might mean adjusting how much you withdraw in years following a market decline rather than sticking to a fixed percentage no matter what the market did that year. It might mean structuring your portfolio’s risk level differently in the years right around your retirement date than you would have during your accumulation years. The specific approach matters less than recognizing that the risk exists in the first place. A lot of retirement plans get built entirely around an assumed average return, with no real answer for what happens if the bad years come first.

2. Claiming Social Security Too Early

Social Security is one of the few pieces of a retirement plan that comes with a guaranteed, inflation-adjusted return simply for waiting. And yet most people don’t wait. The most common claiming age is 62, the earliest possible age, even though claiming that early locks in a permanently reduced benefit for the rest of your life.

The mechanics are worth understanding plainly. Your full retirement age, depending on your birth year, is somewhere between 66 and 67. Claim before that age, and your benefit is reduced. Claim after that age, up until 70, and your benefit increases by roughly two-thirds of one percent for every month you wait, which works out to about 8% for every full year of delay. Wait from full retirement age all the way to 70, and your monthly benefit can end up as much as 24% higher than it would have been at full retirement age, and that’s before any additional cost-of-living adjustments along the way.

That’s a guaranteed increase, not a market bet. There’s no equivalent in a typical investment portfolio, an 8% annual increase with no downside risk attached to it, and it lasts for the rest of your life once you start collecting.

Why do so many people still claim early anyway? Sometimes it’s need. If you’re not working and don’t have other income to bridge the gap, claiming early might be the only realistic option, and that’s a legitimate constraint, not a mistake. Sometimes it’s a health consideration, or a belief that the program won’t be around in its current form, or simply a desire to start collecting money that’s technically already yours. Those are all understandable reasons.

But often, it’s neither of those things. It’s simply the default, the path of least resistance, chosen without running the actual numbers on what delaying would mean for a household’s specific situation, especially for the higher earner in a married couple, whose claiming decision also determines the survivor benefit the other spouse may eventually rely on. That last point gets overlooked constantly. Delaying isn’t just about maximizing your own check. For a married couple, it can be about protecting whichever spouse lives longer.

The decision of when to claim isn’t one-size-fits-all, and there are legitimate reasons to claim early. But it’s a decision that deserves an actual analysis of your specific health, income needs, and household situation, not a default driven by impatience or the assumption that earlier is automatically better.

3. Underestimating Inflation

Inflation is the risk that’s easiest to ignore precisely because it doesn’t show up as a dramatic event. There’s no single bad day you can point to. It just quietly erodes purchasing power, year after year, in a way that’s almost invisible until you look back after a decade or two and realize how much more everything costs.

The math here is deceptively simple and deceptively serious. Even a modest, unremarkable inflation rate compounds significantly over a retirement that might last 25 or 30 years. Something that costs a given amount today can end up costing meaningfully more by the later years of a long retirement, not because anything went wrong, just because that’s what sustained inflation does over enough time. A retirement plan that assumes flat, unchanging expenses for three decades is quietly assuming inflation away, and that’s not a safe assumption to build a 30-year plan around.

This risk hits some categories of spending harder than others. Healthcare costs, in particular, have historically tended to rise faster than general inflation, which matters enormously in retirement, since healthcare tends to make up a larger share of spending later in life, exactly when a fixed income has the least room to absorb rising costs.

It also interacts with the other two risks on this list in ways that compound the problem rather than existing separately. A retiree who’s already dealing with a bad sequence of returns and drawing down a portfolio faster than planned is in a much tougher spot if inflation is also running hotter than expected during those same years. And a retiree who claimed Social Security early, locking in a lower monthly benefit for life, has less of a natural inflation hedge working in their favor, since Social Security’s cost-of-living adjustments apply to whatever base benefit you locked in, smaller base, smaller dollar increases from every future adjustment.

Managing inflation risk in a retirement plan usually means building in some exposure to assets that have historically outpaced inflation over long periods, rather than assuming a fixed-income-heavy portfolio will hold its purchasing power on its own. It also means stress-testing a retirement plan against inflation scenarios that are higher than the recent historical average, not just the average itself, since the plan that only works if inflation stays low is a fragile plan.

Why These Three Belong Together

None of these three risks are complicated to understand on their own. What makes them dangerous is that they tend to interact with each other, and a retirement plan that only accounts for one or two of them while ignoring the third is more fragile than it looks on paper.

A market downturn early in retirement is worse if you’ve also locked in a reduced Social Security benefit and worse still if inflation runs hot at the same time. None of these risks operate in isolation, which is exactly why they deserve to be planned for together rather than addressed one at a time as they come up.

If you’re within a decade of retirement, or already retired, it’s worth asking whether your current plan has an actual answer for each of these three risks, or whether it’s simply assuming they won’t happen. Assuming they won’t happen isn’t the same as planning for the possibility that they will.