In a February 2013 survey of 1,000 employed and retired Americans aged 50-70 with $100,000 or more in investable assets, 90% of respondents said they had experienced a "retirement derailer" - a specific circumstance that seriously impacted their retirement plans or reduced their retirement savings (Source: Ameriprise Financial, February 2013). Approximately 37% of respondents had experienced five or more such circumstances. The top 10 detailers cited by survey respondents were:
- Supporting one or more grown children or grandchildren
- Receiving pension benefits that are lower than expected or not getting an anticipated pension at all
- Losing some retirement savings because of unsuccessful investments
- Taking Social Security benefits before reaching full retirement age
- Experiencing a job loss
- Not getting an anticipated inheritance
- Having to spend a lot of money on home repairs
- Taking care of an aging parent or other family member
- Paying for significant medical bills that aren't covered by insurance
- Using retirement savings to pay bills
To make sure your retirement isn't derailed, consider these tips:
- Start saving now. When asked what they would have done differently, 57% of survey respondents said they wished they would have started saving earlier. Indeed, because of the power of compounding, starting to save for retirement just a few years earlier can make a huge difference in the end.
For example, a 30-year-old puts $400 per month into a tax-deferred retirement plan (like a 401(k) plan), which generates $1,015 per month in retirement income for 30 years beginning at age 65. For the 35 years that the individual is saving (from age 30 to 65), she will have contributed $168,000 to the account. A 45-year-old makes the same amount in total contributions ($168,000 at a rate of $700 per month) to the same retirement account. Even though she has contributed the same dollar amount, because her savings compounded for 15 fewer years, she has about 20% less during retirement (Source: Ameriprise Retirement Calculator).
- Save now to spend later. About 22% of survey respondents said that if they had spent less on discretionary expenses like dining out and vacations during their working years, they would be better prepared for retirement. This is where it's critical to make a budget for current expenditures, a retirement budget, and a plan for how to make retirement work. That plan may involve trimming current expenditures, scaling back retirement expectations, or both.
- Prepare a retirement plan. Unless you plan to work until the day you die, a retirement plan should be an integral part of your overall investment plan - and no matter what your circumstances, an investment plan is a very important way to decrease the likelihood that your life plans will be derailed by unexpected circumstances that inevitably arise.
Think seriously about things for which you might want to spend money before or during retirement - like helping out grown children or grandchildren - and then build that into your retirement plan. Obviously, unexpected circumstances do arise; but if you can anticipate that your children or grandchildren might need help and you are willing to help them, put that into your investment plan.
- Review the implications of taking Social Security benefits before reaching full retirement age. For people who were near retirement age when the Great Recession hit and lost their jobs, taking Social Security at age 62 probably seemed like a far better idea than trying to get a new job at that age. But it's important to understand that while the government will allow you to start taking benefits at age 62, it will penalize you for it: for an individual born in 1960 or later who retires at age 62 instead of age 67 (full retirement age), monthly benefits will be reduced by 30%.
- Have a candid conversation with your parents or other family members whom you might be caring for in old age. Talk about how they'll want to be cared for and the means they have to pay for such care. Urge them to consider long-term-care insurance, which can greatly ease the financial burden of paying for their care in a world in which the average cost for an assisted-living facility is nearly $42,000 a year and is more than $90,000 a year for a nursing home (Source: The Wall Street Journal, October 12, 2012).
If you have already been impacted by one or more of the derailers listed above - or any other circumstance that has impacted your retirement plans - here are five ways you can get back on track:
- Take advantage of catch-up provisions. If you are 50 or older, you can contribute more tax-deferred income to a 401(k) or IRA (these are called catch-up contributions). In 2013, you can contribute $5,500 more to a 401(k) or 4013(b) and $1,000 more to an IRA.
- See where you can trim expenses to save more. Boosting your savings to get back on track for retirement might be easier than you think: most of us spend more than we realize on discretionary things like meals out, clothing, travel, and other personal expenditures. Take a hard look at your budget and see where you can cut back - even $100 per month can make a difference in your retirement savings.
- Evaluate your investment choices. Review your current asset allocation. Many individuals close to retirement pulled money out of the stock market during the financial crisis; and if you haven't since reassessed your asset allocation, you're probably missing out on significant investment opportunities as the equity market rebounds. That said, you want to ensure that your asset allocation is appropriate (not too heavy in equities), given your age and target retirement date.
- Reevaluate your retirement lifestyle. Most financial advisors recommend that you be able to replace at least 70% of your preretirement income during retirement. So if you planned to spend 85% of your current income in retirement, you might be able to scale back and still retire comfortably.
- Work longer. When Social Security was created in 1935, the average American 65-year-old man could expect to live to age 78 and the average American woman to 80. Today, the average American 65-year-old man can expect to live to 84 and the average American woman to 86 (Source: Social Security Administration, 2013). In that context, working five more years might not be such a sacrifice - and it can make a big difference in the retirement lifestyle that you can afford. For a 60-year-old who has a retirement account balance of $250,000 today and contributes $2,000 a year, pushing retirement back from age 65 to age 70 would yield an additional $158,410 in total savings (not counting Social Security) - adding $300 per month to the individual's retirement income.
No matter where you are on the path to retirement or whether you've been derailed or not, please call to discuss this in more detail.