As retirement planning specialists, we have many conversations where we guide clients through pre-retirement anxiety and financial stress in retirement. 

Despite what most people would assume, financial stress can affect individuals regardless of their wealth. This often includes those who have enough money to sustain them throughout their retirement years and leave a generous legacy.

Because the negative effects of financial stress extend to both physical and mental well-being, we feel this is an important topic to address to help retirees live a more rewarding life overall. 

Plus, the cognitive impact of stress may impair decision-making, making it even harder to plan effectively for a sound financial future. 

The good news is that through a deeper understanding of its root causes, different stress management techniques, and—most importantly—proactive financial planning, financial stress can be mitigated. 

Here, we explore the psychology of retirement stress, the most common financial concerns that retirees face, and practical steps you can take to ensure financial stability and peace of mind.

The Neuroscience of Financial Stress

What is the root cause of financial stress, both before and during retirement?

From an evolutionary perspective, our brains are wired to fear scarcity because resource shortages pose a threat to our survival. This perceived threat triggers a fight-or-flight response in the brain, releasing cortisol, which increases the feeling of anxiety. 

The amygdala, the part of your brain responsible for detecting danger, responds to financial uncertainty in the same way it would to physical threats, often causing impulsive or overly cautious behaviors. 

This biological response explains why financial stress can lead to irrational decision-making and underscores the importance of understanding these psychological mechanisms so you can make smarter decisions.

How Financial Stress Affects Your Retirement Portfolio

Behavioral finance studies show that stress amplifies loss aversion—the tendency to fear losses more than we value equivalent gains—which can result in poor financial choices. 

For example, a retiree might react to market volatility by moving their entire portfolio to cash, locking in losses instead of riding out the downturn. Others may hoard cash and avoid necessary investments, missing out on long-term growth opportunities.

Strategies such as cognitive reframing, mindfulness techniques, and behavioral coaching from a financial advisor can help mitigate the effects of financial stress responses on your portfolio.

Five Common Sources of Financial Stress in Retirement

Retirement brings freedom from a daily work routine, but it also shifts your financial responsibilities. Without a steady paycheck, concerns about making ends meet or managing unforeseen expenses can lead to significant anxiety. 

While you can use these 7 ways to mentally prepare for retirement to ease a more existential sense of pre-retirement anxiety, below we identify the most common sources of financial stress in retirement.

• Inadequate Retirement Income: Many retirees fear that their savings won’t cover their lifestyle needs or unexpected emergencies.
• Rising Healthcare Costs: Medical expenses can increase rapidly as you age, adding pressure to your budget.
• Market Volatility: Economic fluctuations and market downturns can impact your investment portfolio, increasing anxiety about the stability of your income.
• Inflation: The gradual increase in living costs means that money saved today might not have the same purchasing power in the future.
• Uncertainty About Longevity: The risk of outliving your savings is a constant concern, especially as life expectancies continue to rise.

When you take the time to plan for these common stressors, you replace uncertainty with a sense of control. This, in turn, lowers stress levels, allowing you to think more rationally, make better financial choices, and approach the future with confidence.

Let’s dive deeper into each of these challenges and explore how you can calm your brain’s response to uncertainty, making retirement planning feel more manageable.

1). Inadequate Retirement Income

This is the retirement fear that we encounter most often…and for good reason. After all, there’s nothing like having the peace of mind of knowing that you will not have to worry about how you’ll pay for your essential and discretionary expenses in retirement.

Many retirees fear that their savings won’t cover their lifestyle needs or unexpected emergencies. If you’re in the pre-retirement planning phase (or if you haven’t yet met with a financial advisor or retirement planning specialist), having a clear picture of your financial state is the first step. 

A thorough review of your finances will help you make informed decisions about retirement income planning.

Review Retirement Income Sources

Begin by assessing all sources of income available to you in retirement, such as:

• Social Security Benefits: Understand your estimated monthly benefit and consider strategies for optimizing these payments.
   
• Pensions: If you have a pension, review the options available, including lump-sum payouts, annuity payments, and survivor benefits.
   
• Investments and Savings: Take stock of your 401(k), IRAs, and other investment accounts, reviewing the balance, asset allocation, and potential for growth.

A comprehensive understanding of these income sources allows you to plan more effectively and reduce the stress of uncertainty about how much money you’ll have available each month. 

Consider meeting with a flat-fee financial advisor to guide you through sustainable retirement income planning strategies such as a risk-based guardrails approach to retirement withdrawals.

2). Rising Healthcare Costs

Medical expenses often rise significantly in retirement, making healthcare one of the largest and most unpredictable costs retirees face. As you age, routine medical care, prescription drugs, and unexpected health issues can add up quickly.

Plan for Healthcare Expenses

Understanding and preparing for healthcare costs in advance can help you maintain financial stability and decrease financial anxiety. Start by evaluating the following key areas:

• Medicare and Supplemental Insurance: Medicare provides essential coverage, but it doesn’t cover everything. Consider Medigap or Medicare Advantage plans to fill the gaps and reduce out-of-pocket costs.
   
• Long-Term Care Needs: The cost of long-term care—whether in-home assistance, assisted living, or a nursing facility—can be substantial. Long-term care insurance can help cover these expenses, preventing them from depleting your savings. Can you afford to self-fund long-term care? Click here to explore your options so you can be financially prepared.
   
• Health Savings Accounts (HSAs): If you have an HSA, maximizing contributions before retirement can provide a tax-advantaged way to cover healthcare expenses later in life.
   
• Emergency Medical Fund: Setting aside a dedicated healthcare fund ensures you’re prepared for unexpected medical bills, reducing financial stress.

By planning ahead for healthcare costs, you can protect your savings, ensure access to necessary care, and reduce financial stress during retirement.

3). Market Volatility

Economic fluctuations and market downturns are inevitable parts of the financial landscape. For many retirees, the fear of outliving their savings due to market volatility is a constant source of anxiety. 

This is where it’s important to have a properly diversified portfolio and a retirement plan that addresses the sequence of returns risk.

Here are a few key strategies to consider:

• Diversify Your Investments
  Spreading your investments across multiple asset classes—such as different kinds of stocks and bonds—helps reduce the impact of any single market downturn. Diversification acts as a risk management tool, so if one area of your portfolio performs poorly, others may help balance it out. Read more about how to determine a proper asset allocation for retirement.
   
• Build a Bond or CD Ladder
  A bond ladder strategy involves purchasing bonds with different maturity dates, ensuring that you have a regular income stream from maturing bonds over time. This strategy provides stability in uncertain markets, as it creates a predictable cash flow, while also allowing you to reinvest maturing bonds at higher rates during rising interest rates. Just be aware of the illusion of not losing money by holding a bond to maturity.
   
• Delay Social Security Benefits
  If possible, delaying your Social Security benefits until your full retirement age (or even later) can significantly increase your monthly benefit amount so that you don’t have to rely on as much of your portfolio in your later years.

Addressing market volatility by having a plan ahead of time can help you reduce the stress and anxiety associated with financial uncertainty.

4) Fears of Losing Purchasing Power

Inflation is an invisible force that gradually diminishes your purchasing power. Over time, the same amount of money will buy fewer goods and services, making it a major concern for those in or approaching retirement. 

Creating a detailed budget that accounts for inflation can help you prepare so that it doesn’t catch you off guard. Let’s break down the key areas where inflation can affect your finances:

• Fixed Expenses
  Fixed expenses, such as housing costs, insurance premiums, and utility bills, tend to increase over time due to inflation. It’s important to factor in these potential increases when planning for retirement. 
   
• Variable Expenses
  Variable expenses, like groceries, travel, and leisure activities, are also susceptible to inflation. While you can’t always predict how much prices will rise, you can plan for a cushion in your budget to handle potential cost increases. For example, setting aside a percentage of your discretionary spending for inflation adjustments can help keep your lifestyle intact. 
   
• Healthcare and Emergency Funds
  Healthcare is one of the most inflation-sensitive expenses in retirement. Medical costs often rise at a rate faster than general inflation, and unexpected health issues can add financial strain. Having a separate healthcare fund or health savings account (HSA) can help ensure you’re financially prepared for these increases.

By preparing for price increases, you can reduce financial stress and maintain your purchasing power throughout retirement.

5) Uncertainty About Longevity

With medical advancements, many people are living longer, healthier lives—meaning that your retirement savings may need to last for 30 years or more. It’s essential to have a structured withdrawal strategy in place to ensure that your money lasts throughout your retirement years. 

Here are a few ways to address the uncertainty of longevity:

• Determine Your Retirement Spending Capacity
  Figure out how much you can afford to spend in retirement based on your assets, income sources, risk tolerance, longevity, and willingness to be flexible in your spending. Instead of a rigid percentage or static withdrawal rate, the retirement spending capacity concept focuses on real, dollar-based figures, so you know exactly how much you can spend, and under what circumstances.
   
• Be Tax-Aware When It Comes to Retirement Withdrawals
  In retirement, keeping your income within certain tax brackets can make a significant difference in how much tax you owe. A strategy where you balance withdrawals between taxable, tax-deferred, and Roth accounts allows you to manage your tax bracket more effectively, preventing you from inadvertently triggering higher taxes that would eat into your retirement savings. Create a withdrawal strategy that exploits marginal tax rates so you can stretch your money further by saving on taxes.
   
• Consider the Role of Survivor Benefits and Annuities
  When trying to mitigate the possibility of outliving your savings, it’s important to consider the potential impact on your surviving spouse or dependents. One of the ways to address this uncertainty is considering survivor benefits or certain types of annuities in your retirement plan. These options can help ensure that your loved ones are provided for or help provide steady income if you live longer than anticipated.

By addressing the risk of outliving your savings, you can increase the likelihood of making your portfolio last throughout retirement.

Your Financial Plan as the Key to Less Financial Stress

When your retirement plan accounts for potential risks—like rising healthcare costs or unexpected market downturns—it helps quiet the brain’s stress response, allowing you to approach financial decisions with a sense of control rather than fear. This shifts your brain from survival mode to strategic thinking, reducing anxiety and improving financial well-being.

The insights shared above reflect the conversations we regularly have with retirees as we assist them in creating, updating, or refining their financial plans. As flat-fee financial advisors, our goal is to help you enjoy a more fulfilling retirement by developing a thoughtful retirement plan that gives you back peace of mind.

Contact us today to schedule a complimentary consultation with one of our retirement planning specialists and take the next step toward a more rewarding retirement.