A Boston College retirement study found that about 50% of Americans are expected to run out of money at some point in retirement. That number is unsettling, but it does not have to apply to you. Running out of money in retirement almost always comes down to five specific risks, and once you understand them, each one has a way to manage it.
Risk 1: Longevity, the Risk That Multiplies Every Other Risk
Longevity, simply how long you live, is the biggest risk of them all, because it is a multiplier for every other risk on this list. If you passed away just three years into retirement, none of the other risks would have time to matter. You would not face a long-term care event, you would not have to worry about withdrawing too much, and inflation would not have time to erode your savings.
But the longer you live, the longer your money has to last, and the more exposed you become to every risk below. That is why the single most valuable thing you can do is find a way to take longevity risk off the table entirely, so it simply does not matter how long you live.
Risk 2: Inflation, the Silent Thief
The cost of everyday things, food, gas, utilities, creeps up a little every year. That slow climb quietly erodes the buying power of retirement accounts, which is exactly why pensions and Social Security often include a cost-of-living adjustment, or COLA, to help offset it.
Here is the trap: many retirees move their money into savings accounts, CDs, or money markets to avoid risk, since those pay 1% or less. But inflation typically runs 2% to 3% a year, so that “safe” money is quietly losing purchasing power the whole time it sits there. Playing it too safe is not actually as safe as it feels.
Risk 3: Withdrawal Rate Risk
Many people have heard of the “4% rule,” the idea that withdrawing 4% of your savings each year will make your money last through retirement. That rule was established back in 1994. With today’s lower interest rates and different market conditions, most planners now consider 3% the safer withdrawal rate, and 2% the truly bulletproof rate.
That drop from 4% to 2% or 3% has a real impact on how much income your savings can actually produce. Here is what it looks like on a $1,000,000 nest egg.
| Withdrawal Rate | Annual Income | Monthly Income |
|---|---|---|
| 4% (the old rule) | $40,000 | $3,333 |
| 3% (considered safe today) | $30,000 | $2,500 |
| 2% (considered bulletproof) | $20,000 | $1,667 |
A full $1,000,000 saved up only produces around $1,667 a month at the most conservative withdrawal rate. That gap between what people expect and what the math actually supports is exactly why so many retirees end up taking out more than they should.
Risk 4: Sequence of Returns Risk
This is one of the least understood risks, and one of the most dangerous. In retirement, the order your returns show up in matters as much as the average return itself.
A retirement that starts with several strong years and hits rough patches later tends to do just fine. A retirement that starts with several bad years does much worse, even with the exact same average return over the full stretch. When the market drops early in retirement and you are withdrawing money at the same time, you end up selling more shares to generate the same income, which permanently shrinks how much you have left to recover when the market eventually bounces back.
This connects directly to withdrawal rate risk. If retirees do not adjust their spending during down markets, they keep pulling the same dollar amount out, which digs the hole even deeper. Retirement requires a completely different mindset than the accumulation years, since you are no longer just growing a portfolio, you are managing distributions from it.
Here is a simplified way to see why order matters so much. Imagine two retirees, each starting with the same $500,000 and withdrawing the same amount every year, but experiencing their market returns in opposite order.
| Retiree | First 5 Years | Last 5 Years | Result |
|---|---|---|---|
| Retiree A | Strong market returns | Weak market returns | Portfolio holds up well, since early growth outpaces later withdrawals |
| Retiree B | Weak market returns | Strong market returns | Portfolio is drained faster, since withdrawals during weak years lock in losses |
Both retirees could end up with the exact same average annual return over the full 10 years. Yet Retiree B can run out of money years before Retiree A, purely because of when the good and bad years happened to land. That is the entire point of sequence of returns risk: averages hide the danger.
Risk 5: Market Risk
We are often told that markets always go up over the long run, and historically that has generally been true in the United States. But “long run” can be a lot longer than retirees can actually afford to wait.
Between 2000 and 2013, often called the “lost decade,” the U.S. stock market produced essentially zero return over 13 years. Japan’s stock market is an even more extreme example: it peaked in the 1980s and still has not fully recovered decades later. It may feel unlikely that something similar could happen here, but retirement income planning should account for the possibility, not assume it away.
One Tool That Addresses Four of the Five Risks at Once
A lifetime income annuity is worth understanding because of how directly it addresses several of these risks together. Because the income is tied to your life, not a fixed number of years, longevity risk is off the table entirely, you cannot outlive the payments.
Because the payment is guaranteed regardless of market performance, withdrawal rate risk, sequence of returns risk, and market risk stop mattering for that portion of your money. It does not matter what order the market’s returns come in, or whether we hit another lost decade, because the payment is fixed and guaranteed no matter what.
One interesting detail about lifetime income annuities is that they pay more the older you are when you start, based on mortality credits. That works similarly to how Social Security pays a larger monthly benefit the longer you wait to claim it. Social Security is, in effect, its own form of lifetime income annuity.
What About Inflation?
A lifetime income annuity handles four of the five risks well, but inflation is the exception. A fixed guaranteed payment will slowly lose purchasing power over a long retirement, just like any other fixed income source.
That is why it is worth keeping some money invested in the market alongside an annuity, rather than putting everything into guaranteed income. As inflation erodes the annuity’s purchasing power over the years, you can draw from your invested account to make up the difference, or use some of that growth to purchase an additional annuity later, layering in more guaranteed income over time.
Think of it as splitting your retirement money into two jobs. One portion’s job is to guarantee your baseline income no matter what happens, covering longevity, withdrawal rate, sequence of returns, and market risk all at once. The other portion’s job is to keep growing over time so it can help your income keep pace with rising costs. Neither piece has to do everything on its own, which is exactly the point.
Every retiree’s mix of guaranteed income and market-invested savings should look different depending on your pension, your Social Security timing, your health, and your overall goals. If you want help figuring out the right balance for your own situation, you can schedule a personal meeting and we will walk through your specific retirement risk picture together.
Frequently Asked Questions
What is the biggest risk in retirement?
Longevity risk, simply how long you live, is considered the biggest, because it multiplies every other risk on this list. The longer your retirement lasts, the more exposure you have to inflation, market downturns, and withdrawal mistakes.
Is the 4% withdrawal rule still accurate?
Most planners now consider it outdated. It was established in 1994 under different interest rate and market conditions. Today, 3% is generally considered a safer withdrawal rate, with 2% viewed as the more bulletproof option.
What is sequence of returns risk?
It is the risk that the order of your investment returns, not just their average, determines how long your money lasts. Bad returns early in retirement, combined with ongoing withdrawals, do far more damage than the same bad returns showing up later.
Does a lifetime income annuity solve every retirement risk?
It directly addresses longevity, withdrawal rate, sequence of returns, and market risk, but it does not solve inflation risk on its own, since the payment is typically fixed. Pairing it with some market-invested savings helps cover that gap.
Why do lifetime income annuities pay more the older I am?
Payments are based on mortality credits, meaning the insurance company factors in your remaining life expectancy. Starting later generally means a higher monthly payment, similar to how waiting longer to claim Social Security increases your monthly benefit.
Why did the safe withdrawal rate drop from 4% to 2-3%?
The original 4% figure was based on market and interest rate conditions from 1994. Lower interest rates and different market behavior since then have led many planners to recommend a more conservative 2% to 3% withdrawal rate to reduce the risk of running out of money.
What was the “lost decade” and could it happen again?
The lost decade refers to the period from 2000 to 2013, when the U.S. stock market produced roughly zero net return. Nobody can predict whether or when it might happen again, which is exactly why retirement income plans should be built to withstand that possibility rather than assume steady growth every year.
P.S. If you found this breakdown of retirement risks helpful and want more videos like this on protecting your retirement income, come join a community of over 150 members working through these exact decisions together, with free courses and resources included.
