• Chris Stein, CFP®

Three Retirement Risks Social Security Can Help Reduce

Social Security, for all its faults ─ and there are many ─ remains one of the most successful government insurance programs ever offered.  Through its lifetime stream of inflation adjusted income, Social Security can help many recipients allay three key retirement risks: longevity risk, inflation risk and market/investment risk.

Longevity risk, or outliving your assets, is one of the biggest concerns keeping retirees up at night. Once you retire, the safety and security of your paycheck is often replaced by the fear and insecurity of running out of assets before running out of life.  Through Social Security’s lifetime payment system, retirees can be assured of receiving at minimum a lifetime government backed stipend. It probably won’t be enough to support a lifestyle beyond basic substance, but it remains solid protection against longevity risk and abject poverty.

Inflation risk is often called the silent killer because its consequences are not felt all at once. It happens slowly, over a number of years. In simple terms, inflation means a dollar tomorrow doesn’t buy quite as many goods and services as a dollar today. As you progress through retirement and inflation continues to grow, the purchasing power of your dollars will dwindle.  To counteract inflation, since the mid ‘70s Social Security has offered an automatic Cost of Living Adjustment (COLA) built into the program. Although far from perfect, the COLA adjustment can help retirees maintain some of their dollars’ spending power.

Market/investment risk can exasperate the effects of inflation and longevity risk by prematurely (and perhaps permanently) reducing the value of your retirement savings.  Losses on investments could mean that retirees living on fixed withdrawals from their portfolio will have less money to draw down to cover living expenses.  Although not a direct line of protection against suffering losses in your investments, Social Security can help mitigate the effects of a market drop through its guaranteed income payments. When downside market volatility reduces your assets, Social Security’s regular guaranteed income payments may allow you to reduce withdrawals and give your portfolio time to recover.

These three risks are not the only ones retirees are subject to, but as a unique, government-run insurance program, Social Security’s guaranteed income benefits can help lessen the severity of these and many of the other risks retirees may encounter.

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