Why Risk Isn't Just About the Stock Market

When most people think about financial risk, they immediately picture the stock market. While market volatility is a significant concern, it’s far from the only factor that can disrupt a retirement plan. Unexpected healthcare costs, tax policy changes, inflation, and longevity risk all pose threats to long-term financial stability. 

By focusing only on investment risk, investors may leave themselves exposed to other financial challenges that can erode wealth just as quickly—if not more so—than a downturn in the market. Let’s explore some key financial risks beyond the stock market and strategies to help mitigate them. 

1. Tax Risk: Potential Changes in Future Tax Rates May Impact Retirement Income 

One of the most overlooked financial risks is the potential for rising tax rates. Many investors assume they will be in a lower tax bracket in retirement, but this may not be the case if tax laws change or if Required Minimum Distributions (RMDs) push them into higher income brackets. 

  • The U.S. national debt and government spending could lead to higher tax rates. 

  • Tax-deferred accounts like traditional 401(k)s and IRAs will be taxed upon withdrawal. 

  • Roth conversions and tax-efficient withdrawal strategies may help mitigate future tax burdens. 

Diversifying retirement savings across taxable, tax-deferred, and tax-free accounts can provide flexibility and help manage potential tax risk. 

2. Longevity Risk: Outliving Your Savings 

People are living longer than ever, and while longevity is a blessing, it can also be a financial challenge. Many retirement plans assume a set number of years, but if retirees live well beyond their projections, they may deplete their assets too soon. 

Ways to Address Longevity Risk: 

  • Creating a structured withdrawal strategy that accounts for extended life expectancy. 

  • Using guaranteed income solutions such as Fixed Indexed Annuities (FIAs) to provide steady cash flow and risk management. 

3. Healthcare and Long-Term Care Costs 

Medical expenses represent one of the largest financial risks for retirees. A significant health event or the need for long-term care can quickly erode savings if not properly planned for. 

Key Statistics: 

  • The average cost of assisted living or nursing home care can exceed $100,000 per year and traditional health insurance and Medicare may not cover long-term care needs. 

Risk Mitigation Strategies: 

  • Health Savings Accounts (HSAs) can be a tax-efficient way to prepare for medical expenses. 

  • Indexed Universal Life (IUL) policies with long-term care riders can help cover healthcare costs while preserving other assets. 

4. Inflation Risk: The Potential Impact on Buying Power 

Inflation quietly reduces the purchasing power of money over time. While historical inflation rates have averaged around 2-3%, certain expenses—such as healthcare—have increased at higher rates. 

How to Address Inflation Risk: 

  • Consider investment strategies that account for inflation-adjusted returns. 

  • Use inflation-adjusted income sources, such as Social Security or annuities with cost-of-living adjustments. 

  • Keep a portion of assets in growth-oriented investments to maintain purchasing power. 

5. Interest Rate Risk and Fixed Income Challenges 

Many retirees rely on bonds and fixed-income investments for stability, but interest rate fluctuations can impact their returns like in recent years. Rising interest rates may reduce bond values, while low rates can make it difficult to generate sufficient income. 

Strategies to Address: 

  • Diversify income sources beyond traditional bonds. 

  • Consider using Fixed Indexed Annuities (FIAs) as a potential strategy for income stability, which may be less affected by interest rate changes. 

  • Maintain flexibility in asset allocation to adjust for economic changes. 

Building a Holistic Risk Management Plan 

Since financial risks beyond the stock market can significantly impact long-term wealth, it’s essential to build a strategy that addresses all aspects of financial stability. 

A comprehensive financial plan considers more than just market fluctuations. Addressing tax risk, longevity risk, healthcare costs, inflation, and interest rate fluctuations can help create a more resilient retirement strategy. 

For a complimentary financial planning consultation or second opinion review, reach out to Advanced Wealth Strategies, conveniently located in Cornelius at 19520 W. Catawba Avenue, Cornelius, NC 28031. Feel free to call or text (704) 765-3653 or email Douglas@PlanWithAWS.com. As fiduciaries, their independent firm will prioritize your best interests.

 

 

Investment Advisory Services offered through EverStar Asset Management, LLC., a SEC Registered Investment Adviser. EverStar Asset Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level or skill or ability. Opinions expressed are subject to change and are not intended as investment advice or to predict future performance. Advanced Wealth Strategies does not offer legal or tax advice.

Douglas Marion