Could life’s curveballs wipe out your retirement savings? Prepare to adjust for unexpected hits to retirement plans.
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.
“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.
FIGURE 1: HERE COMES THAT WILD PITCH. Job loss, or having to take a lower-paying job, is the most common financial disruption among the polled disrupted Americans. But there are other common life curveballs, shown here. Source: TD Ameritrade’s Financial Disruptions Survey Impact of Life Events 2015. Survey: Head Solutions Group.
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:
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:
“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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