Even though many people are faithfully socking away money for retirement, their retirements are more at risk than they realize. That's because most of us are vulnerable to major disruptions in life that can derail our financial futures -- unless we take steps now to protect ourselves.
This issue has been in the news a bit thanks to the TD Ameritrade 2015 Financial Disruptions Survey, which offered sobering statistics, such as the fact that fully 66% of respondents, about two-thirds, had experienced at least one costly disruption. Indeed, it's estimated that the total cost of financial disruptions to Americans is $2.5 trillion in lost savings. That's a big deal!
Let's review its findings.
First off, here are the kinds of disruptions the survey identified that can wreck havoc in our financial lives, along with the percentage of respondents who had experienced them and whose long-term and retirement savings suffered due to them:
- 43%: Unemployment or having to take a lower-paying job
- 36%: Starting a planned family and/or buying a home
- 28%: Poor investment or business performance
- 24%: Having to support others
- 19%: Serious health problems or being unable to work due to an accident or disease
- 18%: Divorce, separation, or the death of a spouse
- 15%: Education
An interesting point the survey revealed is that many people thought they were ready for such disruptions because they were saving regularly. About 84% were saving regularly, with an average amount of $530 per month -- equating to just $6,360 per year, which is not likely to fund a great retirement on its own. The disruptions reduced that to $240 per month, on average. (The median amount saved pre-disruption was even worse, at $220 per month, while during the disruption, the median American was saving just $45, nearly nothing.) Worse still, about half of the disrupted Americans had to tap their retirement savings to deal with the financial crisis.
On average, it took about four and a half years for them to get back on track. And about half of the disrupted folks ended up having to delay or even give up the hope of retiring. Some 21% said they expect to never fully recover from the disruption. The average lost savings per person was $16,240, a not-insignificant sum. Consider, for example, that if the disruption happened at age 35, 30 years before retirement, and $16,500 wasn't available to grow at an annual average of, say, 8% until retirement, the ultimate loss would top $160,000.
Fortunately, you don't have to just nervously wait for trouble. You may be able to take some steps now to better position yourself to deal with financial crises. Let's review each of the disruptions above with that in mind:
Unemployment or having to take a lower-paying job: The fact that you might lose your job unexpectedly at some point, or might end up earning less than you're used to is a great reminder of the importance of an emergency fund. If you have three to 12 months' worth of living expenses socked away in an accessible place (savings account, short-term CDs, etc.), you may not have to take on debt or raid retirement accounts.
Starting a planned family and/or buying a home: These should be happy events to deal with, not financially dangerous ones. They're not so unexpected, either. So if you see a family and homebuying in your future, start saving for that now, aggressively. You might work a second job for a while, or downsize into a smaller apartment for a while, or, if you're in a relationship with someone, see if you can sell one car and get by sharing another one.
Poor investment or business performance: This is a biggie, as it's a cruel thing when someone saves and invests diligently, but does so ineffectively or even destructively. Take some time to learn more about investing, so that you don't fall for penny-stock come-ons or breathless pitches from cold-calling brokers or soon-regrettable hot stock tips from your brother-in-law. Simply investing long-term money in an inexpensive, broad-market index fund such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, and Vanguard Total World Stock ETF, can be all you need to do.
Having to support others: It might be hard to get around supporting your parents, but you may be able to reduce the chances of ending up supporting your grown children. It can help to discuss money frequently as you raise them, helping them choose careers that can support them and guiding them toward smart financial decisions such as saving money and building an emergency fund.
Serious health problems or being unable to work due to an accident or disease: Accidents, and diseases, happen, but you can improve your odds of remaining healthy by eating well, exercising, managing your weight, and not smoking. Also, choose your health insurance carefully, as different plans will cover you to different degrees.
Divorce, separation, or the death of a spouse: Spouses should communicate often and honestly about money -- about their plans for saving and spending and retirement. Both parties should know what accounts exist and how to access them. Few people expect to divorce or be prematurely widowed when they get married, but it's a good idea to have a plan-B in mind, in case it happens. You might, for example, think about how you'll get by financially in the event of a divorce or widowhood, and save accordingly or keep some employment options open. Life insurance is a must if anyone is depending on anyone else financially.
Education: Education can be costly sometimes, but it can more than pay for itself, too. Don't let yourself end up surprised by how much student debt you've taken on or how much you're forking over for Junior's education. Make your education plans carefully, and crunch the numbers. Take advantage of available tax credits such as the American Opportunity Credit or the Lifetime Learning Credit. Look into available financial aid and scholarships, too. And remember that state colleges can be more affordable than private colleges.
Advice from the trenches
The disrupted respondents, when asked what actions would have prepared them better to deal with the troubles that befell them, offered these top ones:
- Saving a greater percentage of their income
- Starting to save earlier than they did
- Learning more about saving and investing for retirement
- Consulting a financial planner or adviser
Know that financial disruptions can be a huge problem, but you can defend yourself against them, too.