There are three types of risk to consider in creating a retirement
savings strategy:

Inflation Risk. During years of employment, periodic pay increases usually offset the impact of inflation. When you retire, however, the rising costs of necessities may have a significant impact on your expected standard of living. Consider this: If you needed $3,000 a month for expenses in 1977, you would need $10,264 a month in 2007 dollars. (Source: Department of Labor, Bureau of Labor Statistics). If your investments and savings don’t beat inflation, you’ll have less buying power than you started with.

You can lower inflation risk by keeping a portion of retirement savings in growth-oriented investments. While higher returning investments do bring higher market risk, potentially higher returns can offset your risks from inflation.

Market Risk. Certain investments, such as stocks, fluctuate with the market. If you’ll be retiring many years from now, the peaks and valleys of the financial markets are less likely to alter your basic retirement savings strategy. A longtime horizon will allow your portfolio to smooth out the ups and downs in the market. Once you retire, and begin withdrawing money, short-term market losses can cause your balance to decrease at an accelerated rate. See the example below.

Diversifying your portfolio to include a variety of stocks, bonds and cash equivalents may help offset market risk, but keep in mind that there is no certainty or assurance that a diversified portfolio will enhance overall return or outperform one that is not diversified.

Longevity Risk. With healthier lifestyle choices and continued advances in medical science, people are living longer. A thoughtful retirement plan should assume that savings will need to last for at least the number of years you can expect to live after you retire. In the coming years, it may be quite common for people to remain active well into their 80s and 90s.

Conservative and careful planning can help alleviate the risk of running out of savings while you are alive. Similarly, an Immediate Annuity (also known as an Income Annuity), is a type of financial contract with an insurance company that can guarantee income for life.