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6 Biggest Risks to Your Retirement Security

An expert offers advice on the best ways to avoid them

By Robert Powell | MarketWatch | August 22, 2014

(This article appeared previously on MarketWatch.com.)

What worries you most about retirement?

Well, if you’re like most retirees and pre-retirees, maintaining the value of your savings and having your investments keep pace with inflation concern you the most, according to a new survey published by the Society of Actuaries (SOA). And having enough money to pay for health care and long-term care round out the top three concerns, according to the 2013 Risks and Process of Retirement Survey Report — Understanding and Managing the Risks of Retirement .

These findings might not come as a surprise to anyone saving for, or living in, retirement. But there’s plenty in the SOA report that you ought to consider.

(MORE: Why I'm Not Buying the Retirement Gloom)

Retirement Planning You Need to Do

“There are areas where people can do a little bit more planning,” said Cindy Levering, a retired pension actuary and member of the SOA’s Committee on Post-Retirement Needs and Risks.

“The one that struck me in [our] report is that very few people were concerned with being a victim of fraud or scam,” said Levering. She noted that people, especially as they get older and their cognitive abilities change, may think that they won’t be taken in, but it happens all the time.

So, action item No. 1 for retirees and pre-retirees would be this: At a minimum, become familiar with common scams and frauds affecting retirees. Here are some resources to learn about them: Securities and Exchange Commission’s Investor Alerts and Bulletins ; Consumer Financial Protection Bureau (CFPB); The North American Securities Administrators Association (NASAA); the Financial Industry Regulatory Authority (Finra); Fraud Target: Senior Citizens; Top 10 Scams Targeting Seniors and The MetLife Study of Elder Financial Abuse.

(MORE: Scammers are Targeting Your Retirement Funds)

6 Big Retirement Risks

Six other risks to your retirement, from the SOA report:

1. Failing to plan for unexpected expenses Americans, or at least those surveyed in the SOA report, are seemingly focused on cash flow management and managing the expenses they anticipate. Said Levering: “We found that people generally don’t have a very long planning horizon. They are looking at it on a more day-to-day basis, adjusting their expenses to meet their income. And while that might work when things are going along nicely, if there are huge [unanticipated] expenditures such as home repairs, car repairs, health or long-term care, that all goes out the window.”

Retirees and pre-retirees told the researchers that they will reduce expenses significantly if it looks like they will run out of money in retirement due to unforeseen circumstances. Some might also try to return to work, downsize their house and dip into money they might have otherwise left their heirs.

The actionable advice based on this finding: Reducing expenses ought to be viewed perhaps as a last-resort risk management strategy. Contemplate first-resort strategies long before you run out money due to unforeseen circumstances.

(MORE: 10 Tips to Prepare for a Great Life After Work)

2. Delaying saving and investing Many retirees who are unconcerned with in-retirement risks, such as long-term care, have neither the resources nor a plan in place for them. The takeaway? Don’t wait until it’s too late to acquire the resources so you can be prepared.

3. Not accounting for inflation Think of it this way, you might need to set aside $2.30 today to pay from something that would cost $1 in 30 years — which is roughly the duration of retirement for some people.

And, as you may know, with the exception of Social Security, most income paid to retirees does not increase with inflation. So, someone planning for 30 years of retirement,would need to factor in how to invest to keep pace with inflation, especially for expenditures that increase even faster than the general cost of living, such as health care.

That means pre-retirees and retirees will need to consider investments and products that offer some protection against inflation such as stocks, Treasury Inflation-Protected Securities (TIPS); inflation-adjusted income annuities,and the like. (FYI: Use the U.S. Inflation Calculator to measure the buying power of the dollar over time.)

Retirees and pre-retirees will also need to watch proposals that would change how Social Security benefits are calculated, according to the SOA. Those proposals, if ever approved, could reduce cost-of-living adjustments to Social Security beneficiaries.

4. Eschewing risk-pooling strategies Few pre-retirees and retirees are use “risk-pooling” strategies such as annuities to manage retirement risks, according to the SOA report. One reason has to do with money. Many don’t have enough financial assets at, or during, retirement to use these strategies effectively. Instead, most resource-constrained retirees try not to spend down assets as one way to avoid outliving their money.

To be fair, Levering said the study doesn’t suggest that retirees and pre-retirees put all their life savings into annuities. “For most people you probably don’t want to annuitize everything,” she said. “You want to have money available to meet crises or these financial shocks that might occur.”

But she does recommend that you take the time to consider buying risk-pooling products. “It’s daunting because there are so many different products, it’s very difficult to compare them,” she said. “They all have different features and options you can buy for an additional premium. But even though it’s daunting, it’s well worth the exercise of allocating your resources in such a way that you can sleep at night.”

Levering is looking forward to the day when 401(k) plan providers offer annuities as one of the distribution options.

5. Retiring too early People often retire at a much earlier age than they want to due to involuntary and pushed retirements. The bottom line: Working longer is an important risk-management strategy, but you’ll need to plan as if you won’t be able to keep working.

In addition, consider options such as phased retirement, part-time work, telecommuting, seasonal work and the like.

6. Failing to consider your lifespan According to the SOA study, many people don’t understand the variability of lifespans or realize that they might be the family member who lives longer than the others.

This is an especially big problem for the surviving member of a couple — which is, more often than not, the wife. And few couples plan for this possibility, according to the SOA.

To be fair, Levering said, “when you drill down to the individual level it’s a hard thing to wrap your head around.”

One action item: Try to get a sense of your personal lifespan and, if applicable, your spouse’s or partner's. Some of the better known calculators include the Living to 100 Life Expectancy Calculator; How Long Will I Live? — Life Expectancy Calculator; Calculators: Life Expectancy — Social Security and Lifespan Calculator — Test Your Life Expectancy.

Those planning for, and living in,retirement sometimes fail to consider that difficulties are much more likely to occur late in retirement, particularly as physical and cognitive capacities decline.

“Recognize that your retirement is going to last at least 30 years, so having a 10-year or less planning horizon is probably not a good thing,” said Levering. “Maybe think of it in buckets and have something to protect you in the three different phases of retirement, especially when you get to the older ages where maybe you’re not as able to deal with the decisions and financial complexities that are involved.”

Robert Powell is a MarketWatch retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.