It's well documented that we Americans aren't the best at retirement planning. We don't put enough money away, or start early enough, to provide ourselves the type of income we expect in our Golden Years.
But a recent survey by TD Ameritrade reveals that even among those of us who are saving, we are ignoring an enormous blind spot -- the unanticipated effects of a sudden life disruption.
What is a "disruption" and why does it matter?
In the release of its findings, TD said that disruptions were, "all major life events that can disrupt long-term savings and investing strategies and negatively impact retirement plans." Common examples are divorce, buying a house, and having serious health issues. The most common disruptor, however, was unemployment or being forced to accept a low paying job.
A full 66% of those surveyed reported having their retirement plans derailed by a major life disruption. That means that many of you reading this piece have either had -- or will have -- such a disruption in your life. This is crucial to retirement planning, because these disruptions cost the average person $16,000 in retirement savings.
Tightening the belt isn't always enough
The good news is that many who have experienced such a disruption made financially healthy choices to help alleviate the problem. The three most common steps taken were "decreasing expenditures, using less credit, and repaying debt." The only problem is that these decisions were largely reactive -- coming after the disruption -- instead of proactive -- as part of a life-long, financially healthy behavioral pattern.
Sadly, those three steps weren't enough for everyone. A full 50% of Americans had to pull money out of savings, or -- potentially even more harmful over the long run -- borrow funds to make ends meet. Concurrently, the average disrupted individual went from saving $530 per month for retirement to $240. And this drop in savings lasted, on average, for four years and eight months.
That's where TD got the $16,000 figure: $290 less per month, times 56 months. But when we think about it, it's probably far higher. Imagine a 40-year old who plans on retiring at age 65. This person is forced to reduce her savings by $290 per month for four years and eight months. Assuming historical stock market returns of 6.9% after inflation, she would have lost over $80,000 of today's dollars come retirement time.
In the end, 49% of disrupted Americans (or roughly one-third of our adult population) reported to TD that they will either need to delay or forgo altogether their retirement plans.
How to avoid this situation
TD asked individuals who had a disruption what they wish -- with the benefit of hindsight -- they could have done differently. Here's what they had to say:
- 44% said they wished they had saved a greater proportion of their income.
- 36% wished that they had started saving and investing at an earlier age.
- 26% would like to have gotten a better education when it came to saving and investing.
An equally important takeaway here is that half of those who underwent a disruption did not have to abandon or delay retirement. I would assume that in addition to taking the steps above, they had two factors on their side.
First, they understood the importance of having an "emergency" fund established that could cover all expenses for three to six months if their income disappeared over night. While having to use this fund might be painful, taking out a loan can have wide-ranging repercussions.
And second, these individuals may have benefited from insuring themselves. While disability insurance can be expensive, it provides a tax-free benefit that helps offset your loss of income if you can't work due to forces outside of your control.
No one is bulletproof, and most people reading this -- myself included -- probably think the likelihood of a disruption is remote. But that's simply not the case. Consider taking some of the steps above, and you'll be putting yourself in a better place to survive a disruption in your finances.