3 Warning Signs Your Retirement Plan May Be Off Track — Even If Your Balance Looks Healthy

Many people spend decades building retirement savings, but the work does not end once they leave the workforce. It is still important to keep an eye on your nest egg and make sure it supports your long-term goals.

Beyond the obvious mistake of putting too much money into stocks, there are other expensive errors that can slip by unnoticed. Here are three warning signs to watch for in a retirement portfolio.

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1. You may be more exposed to inflation than you think

Inflation steadily reduces the buying power of cash that is not invested. Retirees need to pay close attention to this because they are no longer earning paychecks, yet they may face rising expenses, especially for health care, which tends to climb quickly.

Although inflation often runs near 2% to 3%, some periods bring far higher levels. One recent example saw inflation reach 9%. Retirees should run the numbers and see whether their income can keep pace with rising prices. If you have not stress-tested your portfolio against inflation, now is the time to do it so you are not surprised if costs surge.

2. You depend too heavily on a single income stream

Relying on just one source of retirement income is risky. Social Security, a pension, and an investment account can work well together, but depending entirely on one of them can leave you exposed. Stocks can fall in value, and although pensions are generally steady and Social Security tends to rise over time, inflation can still weaken what those payments can buy.

Spreading your retirement income across stocks, bonds, Social Security, investment earnings, and alternative assets can help reduce risk. Dividend stocks may provide extra income alongside Social Security, while alternative assets can serve as useful protection against inflation.

3. You have not accounted for sequence of returns risk

The stock market has historically outpaced inflation and delivered strong long-term gains for patient investors. It is usually easier to ride out downturns earlier in life, but retirement brings a different challenge known as sequence of returns risk.

This risk comes from the fact that retirees must keep withdrawing money to cover living costs, whether the market is up sharply or down significantly in a given year. A steep decline in the first few years of retirement can force you to sell more shares to pay bills. That leaves fewer shares to benefit from a rebound and can disrupt your long-term retirement strategy.

One way to reduce this risk is to keep enough cash set aside to cover at least a year of expenses. A high-yield savings account can help that money earn interest over time, and a certificate of deposit ladder can be another option.

It is also wise to map out a withdrawal plan for the first five years of retirement. You may choose to trim some equity holdings, but it often makes sense to keep stocks you will not need to sell for several years. Growth assets remain an important part of a retiree's portfolio, rather than relying only on cash and bonds.