How to Reduce the Risk of Running Out of Money in Retirement

Running out of money in retirement is rarely caused by one bad investment or one bad year. It usually happens when several risks stack together: an early market decline, withdrawals from the wrong accounts, inflation, tax surprises, healthcare costs, poor Social Security timing, and no reliable income floor. The defense is not a bigger guess about market returns. It is a written income plan that decides, before retirement begins, which dollars will pay which bills in which years.

The short answer: to reduce the risk of running out of money in retirement, cover essential expenses with reliable income sources, keep growth money separate from bill-paying money, coordinate Social Security and tax timing, and update the withdrawal plan every year. A retirement plan should be built around risks, not averages.

The 7 risks that cause retirement income problems

Many retirement-income problems come from seven risks. You do not need to eliminate every risk, because that is impossible. You need each risk assigned to a specific part of the plan.

1. Sequence-of-returns risk: a bad market early in retirement while you are taking withdrawals.
2. Longevity risk: living longer than the plan assumed.
3. Inflation risk: expenses rising faster than income.
4. Tax-timing risk: IRA withdrawals, Roth conversions, RMDs, and Social Security taxation colliding in the same years.
5. Healthcare and Medicare risk: premiums, IRMAA surcharges, and out-of-pocket costs that rise later in life.
6. Long-term-care risk: a care event that forces assets to be sold at the wrong time.
7. Behavior risk: emotional decisions during market drops, job changes, family stress, or health events.

A strong plan gives each of those risks a job description. Market risk belongs in the growth bucket. Essential spending belongs in a more conservative income bucket. Taxes belong in a multi-year calendar. Long-term care belongs in a contingency plan. When every risk has a place, retirement depends less on perfect timing.

Risk 1: A bad market early in retirement

Sequence-of-returns risk is the danger that a market drop early in retirement materially damages the plan. The average return over 30 years can look fine on paper, but if the first few years are bad and you are selling investments to fund income, the portfolio may not recover as expected.

This is the difference between saving for retirement and drawing income from retirement. In your working years, a market decline can be an opportunity because contributions buy more shares. In retirement, the same decline can become a forced sale. You are no longer buying through volatility; you are spending through it.

The planning move is to separate essential income from growth money before the first withdrawal. Housing, food, utilities, insurance, basic healthcare, and taxes should not depend entirely on selling equities in a down market. Cash reserves, short-term bonds, CDs, Treasury ladders, Social Security, pensions, and insurance products with principal-protection features can all help create a buffer when they fit the client's situation. Growth investments still matter, but they should not be responsible for paying every monthly bill.

Risk 2: Planning for average life expectancy

Longevity risk is not just the risk of living a long life. It is the risk of funding a long life with a plan built for an average one. A 65-year-old retiree does not need a plan that works only to age 82 or 85. Many households need a plan that can survive into the 90s, especially for married couples where one spouse may outlive the other by years.

The Social Security Administration's Longevity Visualizer was built in part because joint-life planning is different from single-person life expectancy. For couples, the key question is often not "when do we both pass away?" It is "what happens financially when one spouse survives alone?"

That survivor period is where many plans get fragile. One Social Security check disappears, tax filing status may change from married to single, and household expenses usually do not fall in half. The planning move is to stress-test the plan for the surviving spouse, not just the couple. If the survivor plan does not work, the couple plan is not finished.

Risk 3: Inflation that hits retirees differently

Inflation is not one number in retirement. A retiree's personal inflation rate depends heavily on housing, insurance, utilities, groceries, healthcare, and prescription costs. The Bureau of Labor Statistics even maintains a research index for Americans age 62 and older, the R-CPI-E, because older households spend differently than the general population.

The mistake is assuming that a fixed monthly income will feel fixed. It will not. Even modest inflation compounds over a 25-to-35-year retirement. A $7,000 monthly lifestyle today can require far more later, and the categories that rise fastest are often the least optional.

The planning move is to split expenses into two groups. Essential expenses need reliable income sources designed to last for life. Discretionary expenses need flexibility. Travel, gifts, dining, and major purchases can adjust after a bad market or a high-inflation year. Groceries, utilities, insurance, and property taxes usually cannot. Treating every expense the same is how retirees accidentally make fixed bills compete with market volatility.

Risk 4: Taxes that arrive after the paycheck stops

Many retirees think their taxes automatically fall when they stop working. Sometimes they do. But taxes can climb again later when IRA withdrawals, required minimum distributions, pensions, capital gains, and Social Security all stack in the same tax year.

The IRS says most traditional IRA and retirement-plan owners must start RMDs at age 73, and the first RMD can create two taxable distributions in one year if delayed until the following April. That rule turns a large tax-deferred account into future forced income. It can also push more Social Security into the taxable column and raise Medicare premiums through IRMAA.

The planning move is a multi-year tax calendar. The years after retirement but before RMDs and sometimes before Social Security can be useful years for Roth conversions, taxable-account withdrawals, strategic capital gains, or IRA distributions sized to fill a bracket without spilling into the next problem. The goal is not to pay zero tax this year. The goal is to manage lifetime tax drag across the whole retirement.

Risk 5: Claiming Social Security without a survivor plan

Social Security is one of the few retirement income sources that is inflation-adjusted, backed by the federal government, and payable for life. That makes the claiming decision much bigger than a simple break-even calculation.

For people born in 1943 or later, the Social Security Administration says delayed retirement credits increase benefits by 8% per year after full retirement age until age 70. That does not mean everyone should delay. It means the filing age should be coordinated with cash flow, health, marital status, survivor needs, taxes, and other assets.

For married couples, the higher earner's claiming decision often sets the survivor benefit. If that spouse files early, the surviving spouse may inherit a permanently lower income floor. If delaying is practical, the higher earner's larger benefit can become a form of longevity insurance for whoever lives longer. For a deeper walkthrough, read our Social Security claiming strategy guide.

Risk 6: Healthcare and long-term-care costs

Healthcare is not one line item. It is Medicare premiums, Part D drug costs, supplement or Advantage-plan decisions, dental and vision expenses, deductibles, prescriptions, and possible long-term care. Some of those costs are manageable. Others can arrive suddenly and force bad financial decisions.

Long-term care is the biggest uncontrolled expense for many households. Genworth and CareScout's 2024 Cost of Care Survey reported a national annual median cost of $127,750 for a private room in a nursing home. Even if a care event lasts only two or three years, it can consume assets that were supposed to support both spouses for decades.

The planning move is to decide in advance how care would be funded. Some households use traditional long-term-care insurance. Some use hybrid life or annuity strategies. Some self-insure with a dedicated asset pool. Some use annuities with long-term-care income doublers. The worst answer is no answer, because then the plan gets written during a crisis.

Risk 7: No reliable income floor

A retirement portfolio can be large and still fragile if every dollar of income depends on market performance. The purpose of a reliable income floor is simple: cover the bills you cannot skip with income sources designed to last for life.

That floor can come from Social Security, pensions, and, in some cases, annuities with lifetime income features. The point is not to put every dollar into guaranteed income. The point is to make sure essential spending is not forced to compete with market cycles. Once the non-negotiable bills are covered, the rest of the portfolio can stay invested for growth, inflation protection, legacy, and discretionary spending.

This is where fixed-indexed annuities, income riders, and our IncomeMAX™ planning framework may fit for some households. They are not universal answers, and they are not substitutes for a full plan. They are tools for a specific job: turning part of a balance sheet into a more predictable income stream.

Important: annuities are insurance products, not bank deposits or market investments. Any guarantees are subject to the claims-paying ability of the issuing insurance company and the terms of the contract. Optional riders may carry additional fees, and surrender charges or tax consequences may apply if money is withdrawn early. A recommendation should be based on the client's age, liquidity needs, income goals, risk tolerance, tax situation, and the terms of the specific contract being considered.

A simple retirement-income stress test

Before you retire, run the plan through these questions:

• What happens if the market falls 25% in the first two years?
• Which accounts fund spending before Social Security starts?
• What is the survivor's income after the first spouse dies?
• What happens to taxes once RMDs begin?
• How close are you to the next IRMAA bracket?
• Which expenses are essential, and which can flex?
• How would a two-year care event be paid for?
• What income sources are designed to last for life?

If those answers are written down and coordinated, you have the foundation of a retirement income plan. If they are scattered across account statements, tax returns, and a rough withdrawal estimate, you have pieces of a plan. Pieces are not enough when the decisions become irreversible.

The bottom line

One way to reduce the risk of running out of money in retirement is to stop treating retirement like one big investment account. It is a sequence of income decisions: when to claim Social Security, which account to spend first, how much tax to recognize this year, which assets need less exposure to market loss, how to fund healthcare, and how to plan for the surviving spouse.

A good plan does not promise that nothing bad will happen. It is designed so one bad event is less likely to trigger three more. If you would like a no-pressure second opinion on whether your current plan can handle these seven risks, our free Retirement Check-Up is a 30-to-60-minute conversation, zero cost and zero obligation. We do this work every day for households in Bloomfield Hills, Troy, Auburn Hills, and across Metro Detroit.

This article is for educational purposes only and should not be treated as individualized investment, tax, legal, or insurance advice. Any strategy should be reviewed in light of your full financial picture and, where appropriate, with your tax or legal professional.