Retirement risk: spending shocks over markets

Retirement’s Biggest Threat May Not Be the Market For years, retirement planning has centered on a familiar villain: market volatility. Advisers stress-test portfolios for bear markets, sequence-of-returns risk, and inflation shocks. But a newer body of research points to a different source of anxiety for retirees and near-retirees: sudden spending shocks, especially those tied to health problems, long-term care, and unplanned early exits from the workforce. Recent reporting from the Associated Press, new research highlighted by LIMRA, and fresh commentary from retirement researcher Wade Pfau all point in the same direction. The central retirement question is shifting from “What if markets fall?” to “What if spending suddenly jumps?” (limra.com) That distinction matters because market declines and spending shocks behave very differently. A portfolio loss is painful, but it is visible, widely discussed, and often modeled in advance. A spending shock is more personal and less predictable. It can arrive as a chronic illness, a need for home care, a spouse’s medical event, or a forced retirement a few years earlier than planned. Those events do not just reduce wealth on paper. They require cash, often immediately, and they can permanently alter how a household spends for the rest of retirement. Research from the Center for Retirement Research at Boston College describes this as a gap between how households perceive healthcare risk and the actual costs they may face. (crr.bc.edu) The new LIMRA Retirement Income Institute findings make the shift in concern explicit. In its April 6, 2026 release, LIMRA said Americans are “far more concerned” about the financial impact of health-related risks in retirement than about market volatility, inflation, or economic downturns. The organization tied that concern to longevity and chronic illness, two forces that can stretch retirement over more years while also raising the odds of expensive care needs. In other words, the risk is not just living longer. It is living longer while encountering more years in which spending can spike unexpectedly. (limra.com) Health-related costs sit at the center of that fear because they are both large and unevenly distributed. Some retirees will have manageable out-of-pocket costs for years. Others will face a steep jump late in life, especially if they need assistance with daily activities or memory care. LIMRA’s earlier retirement research has found that more than 40% of retirees experienced higher-than-expected health care and long-term care costs in retirement, with the biggest mismatch between expectations and reality in those categories. (limra.com) Outside research reinforces the same pattern. Fidelity said in July 2025 that a 65-year-old retiring in 2025 can expect to spend an average of $172,500 on healthcare and medical expenses throughout retirement. That estimate does not include every possible long-term care scenario, which means the most severe care events can still sit outside headline planning figures. The result is a planning problem: even households that think they have “budgeted for healthcare” may still be underprepared for the most disruptive expenses. (newsroom.fidelity.com) Another reason spending shocks loom so large is that many households underestimate how likely they are to need long-term care at all. A Jackson study covered by InsuranceNewsNet in January 2025 found that only 27% of investors surveyed believed they would require long-term care, while 70% of people turning 65 are likely to need that type of care. That is a striking mismatch between expectation and probability. If people assume an event is unlikely, they are less likely to set aside liquid reserves, buy protection, or adjust spending plans before retirement begins. (insurancenewsnet.com) Early retirement is another version of the same problem. When someone leaves work sooner than expected because of layoffs, caregiving, burnout, or health limitations, the math worsens from both sides at once. Savings stop growing because paychecks stop, and withdrawals may begin earlier because expenses do not wait. That creates a double hit that a standard “average retirement age” plan may not capture. Even if the portfolio performs reasonably well, the household may still end up drawing from savings at exactly the wrong time and for longer than planned. (crr.bc.edu) This is where the market story becomes more nuanced. The new evidence does not mean investment risk has disappeared. It means market risk is only one piece of retirement fragility. Wade Pfau told Morningstar this week that higher bond yields are a plus for retirees and discussed ways to address sequence risk, the danger of suffering poor market returns early in retirement while making withdrawals. Higher yields improve the starting conditions for generating income from safer assets, which can help retirees fund near-term spending with less dependence on stocks. (morningstar.com) That change in bond yields is important because it gives planners more flexibility than they had during the low-rate years. When high-quality bonds and Treasury Inflation-Protected Securities offer more meaningful yields, retirees can build ladders or reserve buckets that cover several years of spending with less guesswork. Morningstar has recently described Treasury Inflation-Protected Securities ladders as a way to fund a consistent real withdrawal rate by using yields plus maturing principal over time. That does not solve every retirement problem, but it does make it easier to match assets to spending needs that are known or likely in the first phase of retirement. (morningstar.com) The catch is that better bond yields do not neutralize health shocks. A bond ladder can help cover planned income needs. It cannot fully absorb a sudden need for assisted living, home health aides, or years of elevated out-of-pocket costs unless those possibilities were already built into the plan. That is why the new retirement conversation is moving away from pure portfolio optimization and toward resilience. Advisers are being pushed to ask not only whether a client can survive a bear market, but whether the household could withstand a $50,000 or $100,000 spending surprise without unraveling the rest of the plan. That conclusion is an inference drawn from the combination of LIMRA’s health-risk findings and Morningstar’s discussion of improved fixed-income tools. (limra.com) In practice, that means retirement plans may need more scenario testing and less reliance on a single withdrawal rule. A resilient plan would examine what happens if retirement starts three years early, if one spouse needs long-term care, if healthcare inflation outpaces general inflation, or if large withdrawals coincide with weak markets. It would also separate essential expenses from discretionary ones, since cutting travel is very different from cutting medication, housing support, or caregiving. Morningstar and outside retirement researchers have increasingly emphasized that withdrawal rates depend on starting conditions and real-world spending patterns, not just a static rule of thumb. (morningstar.com) The planning industry has some advantages in addressing this shift. Health-related risks are hard to predict for any one household, but they are not invisible as a category. Advisers can model long-term care scenarios, discuss insurance tradeoffs, earmark liquid assets, and build income floors with bonds, annuities, pensions, or Social Security timing strategies. LIMRA’s broader retirement research has also found that retirees with enough lifetime-guaranteed income to cover basic living expenses report greater confidence, suggesting that dependable income can reduce the stress created by uncertain future costs. (limra.com) The deeper lesson is that retirement security is less