Retirement is a milestone many work towards for decades, hoping it will be a time of peace, relaxation, and financial freedom. However, for many, the journey to retirement doesn’t always go as planned. With rising living costs, market volatility, and rising healthcare costs, retirees face risks that can undermine their hard-earned savings. Among these risks, three stand out as particularly dangerous: inflation, sequence-of-returns risk, and healthcare costs. These three threats form a “triple threat” that can derail even the most carefully crafted retirement plans.

Let’s explore how these risks interact with each other and, most importantly, how you can hedge against them to ensure your retirement remains as secure and stress-free as possible.

The Silent Erosion: Inflation Risk

Inflation is often the most understated yet dangerous threat to retirement savings. Inflation is the rise in prices of goods and services over time, meaning the purchasing power of your money decreases. What costs $100 today may cost $150 or more in 20 years. For retirees living on a fixed income, this can be particularly devastating.

Consider this: if your monthly living expenses amount to $3,000 today, in 20 years, at an average inflation rate of 3%, that same lifestyle could cost around $5,400. But if your income doesn’t increase accordingly, that gap can force you to adjust your standard of living significantly or even deplete your savings more quickly than anticipated.

The tricky thing about inflation is that it’s often gradual, so people don’t feel the full impact immediately. However, over time, the cumulative effect can be a severe blow to retirement plans. Social Security and other fixed retirement income sources often fail to keep pace with inflation, leaving retirees to fend for themselves.

The Rollercoaster Ride: Sequence of Returns Risk

While inflation is a slow, steady threat, sequence-of-returns risk can hit you when you least expect it. The term refers to the timing of investment returns and how it affects your withdrawals during retirement. Let’s say you retire with a healthy nest egg of $1 million. Suppose the market experiences a major downturn in the first few years of your retirement and you continue withdrawing from your portfolio to cover living expenses. In that case, your savings can take a huge hit. This is because you’re selling investments at a loss to fund your lifestyle.

In the early years of retirement, your portfolio might still be exposed to market fluctuations. The sequence of returns is critical because negative returns in the early years can dramatically shorten your portfolio’s longevity. Even if you have an overall positive return over the long term, the sequence of returns can change the outcome depending on when the gains or losses occur.

For example, imagine a retiree with a $1 million portfolio, withdrawing 4% annually. If the portfolio loses 20% in the first year and then gains 20% the following year, they’ll have less than $1 million remaining. This highlights how even a moderate loss early on, combined with withdrawals, can compound the problem, creating a much more fragile retirement than expected.

The Health Crisis: Healthcare Costs

The third and perhaps most unpredictable risk facing retirees is healthcare costs. Healthcare expenses tend to rise with age, and with the average 65-year-old couple estimated to need over $350,000 for medical expenses during retirement, it’s no surprise that healthcare is a major concern.

Traditional health insurance doesn’t cover everything, and long-term care costs can drain savings rapidly. In fact, healthcare costs are one of the largest contributors to unplanned expenses in retirement. The problem is compounded by the fact that, as people age, they tend to require more medical attention, which often comes at a steep price.

But healthcare isn’t just about hospital bills and insurance premiums. Long-term care, whether in-home care or a nursing home, can cost upwards of $50,000 per year and isn’t typically covered by Medicare. Many retirees have not saved enough to meet these potential expenses, leading to anxiety and, in some cases, the need to dip into their retirement savings to cover medical costs.

The Triple Threat: How They Work Together

When inflation, sequence-of-returns risk, and healthcare costs converge, they create a financial storm that can quickly deplete retirement savings. Here’s how they interact:

1. Rising Costs Due to Inflation: As inflation steadily raises the cost of living, your retirement income may no longer cover all of your basic needs. Healthcare costs, already significant, are particularly vulnerable to inflation, making them an even bigger burden in the long run.
2. Sequence of Returns Risk Accelerates Depletion: When you withdraw from a portfolio that’s underperforming in the early years of retirement, you’re locking in losses that compound over time. Withdrawing to cover rising healthcare costs can deplete your savings faster, especially if the market is in a downturn when you start retirement.
3. Unexpected Medical Expenses: The cost of healthcare doesn’t follow a predictable pattern and can spike suddenly due to an unexpected health crisis. When you need to access large amounts of money for medical care, and your portfolio is already weakened by a poor sequence of returns and inflation, you could find yourself financially strapped and without the ability to recover.

Strategies to Hedge Against the Triple Threat

Fortunately, there are strategies to minimize the impact of this triple threat on your retirement plan. Let’s explore a few key options:

1. Consider Inflation-Protected Income Streams: One way to hedge against inflation is by incorporating inflation-adjusted income streams into your retirement plan. Annuities with cost-of-living adjustments (COLAs) can provide you with a guaranteed income that increases over time to keep pace with inflation. This ensures that your retirement income keeps pace with rising costs of goods and services.
2. Diversify with Fixed and Variable Instruments: While you can’t control market returns, you can control the assets you invest in. Combining a mixture of stocks, bonds, and guaranteed income instruments (such as annuities) can help provide stability in your portfolio, especially when you’re close to or in retirement. Annuities, for example, can provide a predictable income stream, insulating you from market fluctuations.
3. Health Savings Accounts (HSAs): Use an HSA to help plan for healthcare costs. An HSA allows you to set aside money tax-free for healthcare expenses, which is an excellent way to prepare for the high costs of medical care in retirement. If you don’t need to use these funds before retirement, they can grow over time, offering a sizable cushion for your healthcare needs when you retire.
4. Delay Social Security: The longer you wait to claim Social Security benefits, the higher your monthly check will be. Delaying Social Security can give your savings more time to grow and protect you against rising inflation and healthcare costs by providing a more substantial income later on in retirement.
5. Build a Cash Reserve: Having a cash reserve set aside for emergencies, including healthcare costs, will help you avoid withdrawing from your investments at a loss during a market downturn. It also provides peace of mind knowing that you have funds available when unexpected costs arise.

Conclusion: Stay Prepared and Proactive

The triple threat of inflation, sequence-of-returns risk, and healthcare costs is a powerful force that can undermine your retirement savings if you’re not prepared. However, by understanding how these risks interact and implementing strategic measures such as diversifying your assets, securing guaranteed income streams, and preparing for healthcare costs, you can protect yourself from the financial uncertainty many retirees face.

Retirement should be a time of peace and enjoyment, not stress and worry. By taking proactive steps now, you can ensure that your retirement plan stays on track, no matter what life throws your way. So, take control of your retirement today—before the triple threat catches you off guard tomorrow.