Retirement Derailed: How Economic and Life Events Affect Savings

Recent research from various sources has uncovered an upsetting trend in financial planning in America: 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 have transpired to make retirement financially burdensome even for those who have long planned their exit from the workplace? 

A recent survey* of retired and working Americans ages 50-70 unveiled that the overwhelming majority (90%) has experienced some economic or life event that has had a financial impact on their retirement savings goals. The average respondent experienced four of these events, which range from derailers that are beyond their control such as the effects of the recession, to family and lifestyle choices that have lasting financial consequences. In the end, these events set respondents back $117,000 on average. In fact, nearly two in five of the respondents (37%) experienced five or more unanticipated events costing them approximately $144,000. 

The most commonly cited derailer, which nearly two-thirds (63%) of survey participants report experiencing, is low interest rates that impacted the growth of their retirement assets. More than half (55%) say the recession significantly lowered their retirement savings due to market declines, and one-third (33%) of respondents convey that their home equity is not going to help as much as anticipated for retirement. Other common derailers include supporting a grown child or grandchild (23%), pension plans that are not worth as much as planned or have been discontinued (23%) and bad investments (22%). 

It’s impossible to predict which events may happen in the future that could derail your retirement plans, but there are ways to help lessen the impact of unexpected derailers. Here are a few: 

Save as much as you can. Nearly three in five (57%) 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 may spend less and save or perhaps work longer. 

Make a budget. Making a budget and sticking to it can be helpful in making day-to-day spending decisions. One-third (33%) of survey respondents admit they 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 the future. 

Maintain an emergency fund. You’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. 

Purchase the right kind and amount of insurance. Half of retirees and pre-retirees 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 healthcare costs if you plan to retire before you’re eligible for Medicare coverage. 

Seek help to develop a written plan. There may be wisdom in seeking professional help. Of those surveyed who have a financial advisor, nearly three out of four (74%) report they have a written financial plan, compared with 39% of those without financial advisors. Having a written plan in place may promote financial stability in retirement; those who are confident that they can afford essential expenses in retirement are likely to have written financial plans (66% vs. 59%). Furthermore, those who say they have had a smooth road to retirement are more likely to have written financial plans in place than those who characterize their journey as bumpy (65% vs. 55%). 

Rob Davis lives in University Place with his wife Lorri and sons Wesley and Parker. He is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Tacoma, Washington. Rob specializes in fee-based financial planning and asset management strategies and has been in practice for 35 years. He is licensed/registered to do business with U.S. residents only in the states of Washington, Idaho and Arizona. You may contact Rob at ameripriseadvisors.com/robert.g.davis. 

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.   

*The Retirement DerailersSM survey was created by Ameriprise Financial utilizing survey responses from 1,000 employed and retired Americans ages 50-70. All respondents have investable assets of at least $100,000 (including employer retirement plans, but not real estate). The survey was commissioned by Ameriprise Financial, Inc. and conducted via telephone interviews by Koski Research from February 21- February 28, 2013.