As “disruption” and “disruptor” take their places as troublesome nouns in the modern lexicon, here comes a phrase that is quickly defining a sorry state of financial health for some: Disrupted American.
An increasing number of Americans say they’ve experienced some disruption on the way to retirement—that is, a major life event has undercut their long-term savings and investing plans, according to two-thirds of those polled in a TD Ameritrade study.
Change is Inevitable
“Every human being faces the threat of a financial disruption, because there will always be external factors that can upset the course of a person’s life,” says Lule Demmissie, managing director of investment products and guidance at TD Ameritrade.
Financial disruption events take many forms. Some, such as buying a house, are intentional. Others, like major health issues, bad investment decisions, divorce, or unemployment, are often shockers that can upend even the best of retirement plans (see figure 1).
Cumulatively, disrupted Americans have suffered a staggering opportunity cost of $2.5 trillion—yes, trillion—in long-term and retirement savings that weren’t put aside, TD Ameritrade’s 2015 Financial Disruption Survey found.
Stats Stacked Against Us
At this point, most of us will live longer than our ancestors. And because of that, we should be accumulating more wealth. By the Federal Reserve’s reckoning, retirement-plan participation has never fully recovered from pre-recession levels, according to its triennial Survey of Consumer Finances. In 2013—its latest available figures—plan participation stayed on the downward trajectory it started in 2007. And that was for families in the bottom half of the income spectrum, not those just at the bottom. Although participation rebounded for upper-middle income families, it was a slight revival and does not yet match 2007 levels, the Fed said.
In its study, TD Ameritrade compared life before disruption (LBD) with life during disruption (LDD) and found:
- In LBD, 84% were saving, on average, some $530 a month for retirement. LDD forced 79% of them to trim their savings and/or expenditures, shaving a median $340 per month in retirement savings, or $16,240 in lost savings per person.
- Some 40% were comfortable in LBD that their steady income prepared them for a disruptive event. When it happened, however, 50% had to dig into savings or borrow funds to make ends meet, evidence of how long and deep the mending process can be.
- In LDD, recovery mode called for respondents to tug the reins on expenditures and credit use while paying down debt.
Eye on the Ball
Hindsight, of course, generally beats foresight, and 44% of those disrupted claimed they would have saved a bigger chunk of income, while 36% said they would have started saving or investing earlier for retirement, something that all financial planners encourage. Interestingly, 26% wished they had been better schooled about long-term savings and investment, underscoring a rally call among educators to mandate financial planning courses in high school.
“A retirement plan is adjustable and should evolve over time, so self-directed investors are in a better position to more easily take a hands-on approach to their retirement and investing strategies,” Demmissie said.
Of retired baby boomers canvassed by TD Ameritrade in another survey, those who considered themselves successfully prepared for their golden years credited five actions:
- 67% said they limited spending on credit
- 58% relied on the early-and-often approach to saving
- 58% didn’t spoil themselves on unnecessary luxuries or discretionary items
- 56% said it helped that they were employed with an “excellent” salary
- 51% invested in and maintained a well-balanced portfolio
“While no one can predict when, or if, a financial disruption will occur, the key is to focus on what can be controlled,” Demmissie said. “Understanding one’s retirement goals, regularly evaluating your portfolio, and being prepared to make adjustments to your long-term strategy along the way can help you pursue your retirement plan.”
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