Like you, we read many articles on the Internet that dispense financial advice to retirees. This one entitled, “11 Financial Traps Retirees Don’t See Coming” recently caught our attention. While we hope that most of our readers are aware of these financial traps and are planning for them, it doesn’t hurt to revisit them from time.
In this post, we will summarize and briefly discuss the eleven financial traps (or risks) set forth in the article and how almost all these risks are relatively easily addressed by applying the Actuarial Approach. We will also add a few to the author’s list.
Financial Traps During Retirement
- Underestimating health-care costs—We encourage users to separate their expected health-care costs in the Actuarial Financial Planner (AFP) and possibly assume a higher rate of future increase for these essential recurring expenses.
- Relying too heavily on Social Security—The present value of future Social Security benefits (assuming no future reductions) based on a non-risky investment return discount rate is included as an asset in the household’s actuarial balance sheet in the AFP. It may not be unreasonable to assume that these benefits will be reduced in the future when the Social Security trust fund is projected to be exhausted.
- Failing to adjust spending habits—We recommend periodically measuring the household’s Funded Status and making adjustments in spending liabilities or assets when the Funded Status falls outside our recommended guardrails.
- Underestimating inflation—We provide default assumptions for inflation, but these default assumptions can be overridden
- Ignoring tax implications—We encourage users to estimate future taxes as essential expenses and possibly assume a higher rate of future increase for these expenses if such increases are anticipated.
- Overcommitting financial support to family—This risk falls under the general risk category of overspending and is addressed in the Actuarial Approach by determining what the impact on the household Funded Status would be if such support is provided.
- Failing to plan for long-term-care--We encourage users to plan for LTC as discussed in our previous post (and as will be expanded in an upcoming article).
- Overconfidence in investments—We encourage users to separately fund the present value of their essential expenses with non-risky assets/investments like pensions, Social Security, TIPS and life annuities. Such investment enables users to invest more aggressively and confidently with their remaining assets.
- Falling for scams or fraud—We hope our users will not be victims of scams or fraud, but these possibilities are not specifically addressed by the Actuarial Approach
- Not updating estate plans—This is another risk to avoid, but we also do not specifically address this risk in the Actuarial Approach.
- Overlooking longevity risks—This is a risk we address with our default lifetime planning period assumptions
Other risks that can be addressed with the Actuarial Approach
There are several other risks not included in the article that you may also wish to model or consider with help from the Actuarial Approach, including:
- Failure to adequately insure insurable events (life, property, health, automobile, long-term care, business litigation, etc.)
- Marital dissolution
- Possible decreases in future Social Security benefits
- Inadequately planning for the expenses of the surviving member of the household after the first death
- Risk of insurance premiums or taxes increasing faster than expected
- Investing too conservatively
- Different rates of future increases in different types of expenses
- Underspending (see our post of May 7, 2025)
Summary
Retirees face many financial risks (potential traps) during retirement. The Actuarial Approach, with its Actuarial Financial Planner model and annual valuation process, can help you measure and manage these risks to achieve your (or your client’s) financial goals in retirement.
