Recent research has uncovered an upsetting trend in financial planning in the United States. Many Americans nearing retirement are underprepared. But less studied are the reasons why Americans are so ill-equipped to fund this major life stage. What events transpired to make retirement financially burdensome even for those who have long planned their exit from the workplace?
A recent Ameriprise Financial Inc. survey of 1,000 employed and retired Americans, ages 50 to 70 with investable assets of at least $100,000, revealed a staggering number had recently hit a savings bump in the road. The overwhelming majority – about 90 percent – had experienced some economic or life event that had a financial impact on their retirement savings goals. The average respondent experienced four of these events, ranging from derailers that are beyond their control, such as the effects of the recession, to family and lifestyle choices with lasting financial consequences.
In the end, these events set respondents back about $117,000 on average, and nearly two in five of the respondents – about 37 percent – experienced five or more unanticipated events costing them approximately $144,000.
The most commonly cited derailer, which nearly two-thirds, or 63 percent, of survey participants report experiencing, is low interest rates that impacted the growth of their retirement assets. At 55 percent, more than half say the recession significantly lowered their retirement savings due to market declines, and one-third of respondents convey their home equity is not going to help as much as anticipated for retirement.
Other common derailers: 23 percent support a grown child or grandchild; 23 percent say pension plans are not worth as much as planned or have been discontinued; and 22 percent say it’s simply a result of bad investments.
It’s impossible to predict which events might happen in the future that could derail retirement plans, but there are ways to help lessen the impact of unexpected derailers.
Save as much as you canAt 57 percent, more than half of survey respondents say they wish they’d started saving earlier.
Saving systematically into a 401(k) and other investments as early and often as possible is a great way to prepare for retirement over the long term.
Calculate what you think you’ll need for various expenses in retirement and save accordingly.
If possible, save even more than you think you’ll need. Consider setting aside bonuses or tax returns into retirement savings, and increase your contributions to your employer-sponsored retirement plan as you near retirement. If you’re nearing retirement and coming up short, determine how you might spend less and save or perhaps work longer.
Make a budgetMaking a budget and sticking to it can be helpful in making day-to-day spending decisions. Nearly 33 percent of survey respondents wish they would’ve spent less cash on extra expenses like eating out and vacations. Though some of these activities can be successfully integrated into your overall financial plan, being prudent with your money is sometimes a matter of making trade-offs now to help avoid having to make them in the future.
Write it downThere may be wisdom in seeking professional help. Of those surveyed who have a financial adviser, nearly three out of four report they have a written financial plan, compared with 39 percent of those without financial advisers.
Having a written plan in place may promote financial stability in retirement. About 65 percent of those who said they have had a smooth road to retirement had a written financial plan in place.
Maintain an emergency fundYou’ve likely experienced a financial event – such as an unexpected car repair or medical bill – in which you relied on your emergency savings. After you leave the workforce, maintaining an emergency fund is perhaps even more important, yet only 33 percent of respondents are extremely or very confident they can afford such an expense in retirement. Unexpected events are inevitable, but you can prepare for bumps in the road before and during retirement by factoring them into your financial plan and keeping cash on hand.
Review insurance optionsHalf of retirees and preretirees who experienced the death of a spouse or a disability had adequate insurance coverage and were able to maintain their lifestyle – but half did not.
Consider disability, life and long-term care possibilities and be thorough in doing your homework before choosing which kinds and how much coverage you need. Also determine a plan to cover health care costs if you plan to retire before you’re eligible for Medicare coverage.
Paula Dougherty, CFP, ChFC, CLU, is a financial adviser with Dougherty & Associates, Ameriprise Financial Services Inc. in Springfield. She is licensed in Missouri, Arkansas, Kansas, California and Arizona and may be reached at paula.j.dougherty@ampf.com.
