Life Happens: Retirement Planning for the Unexpected

Some people spend decades focusing on retirement planning, only to get derailed by unexpected events such as a job loss, market downturn, medical scare, death of a spouse who’s been the primary provider, or other untimely circumstances. Preparing for unexpected events with an emergency fund, a smart investment plan, and regular financial checkups can help you manage such financially pressing times.

Establish a Cash Reserve

Anyone at any age can be affected by financial setbacks. That's why it’s important that as you think about retirement planning, you have an emergency fund to cover expenses when your cash flow is affected. There are plenty of ways to build cash reserves, and it’s never too early or too late to begin retirement financial planning. Having an emergency fund doesn’t negate the importance of long-term investing. Both should be priorities, but saving for an emergency fund should come first.

“You should always focus on having an ample cash reserve,” said Robert Siuty, a senior financial consultant at TD Ameritrade. “Have three to six months of expenses earmarked as part of your financial plan.”

Maintain a Well-Diversified Portfolio

Stock market corrections are a common setback. If you’re younger and have a well-diversified portfolio, you may be able to better weather the downturns, because time is on your side. Some younger investors view these downturns as an opportunity to accumulate assets at a relatively better price. But if the stock market takes a dive just as you near retirement, coping with losses can be difficult.   

As you age, it’s often smart to start shifting your asset allocation so you’re not so vulnerable to possible market downturns. Again, when you’re younger, you may be able to afford to take on more risk. As you get closer to retirement, though, you need to manage your overall risk so you’re not overly exposed. 

Siuty said a conservative portfolio for an investor approaching retirement might be 25% in stocks and 75% in different types of fixed income, where as a younger investor preparing for retirement can afford greater risk, so can invest a greater percentage in stocks. 

Checking your asset allocation regularly is crucial in retirement planning. With a bear market now in its ninth year, your portfolio has a bigger percentage of funds in stocks than is appropriate for your age or situation. Pay attention and shift funds around if you need to in order to follow your retirement plan.

Be Wary of Early Retirement Fund Withdrawals

If you’re affected by a setback, chances are you’ll need cash to tide you over. Although it may be tempting to dip into your 401(k) plan, that should be the last thing you do after determining there are no other savings to draw from.   

Taking an early withdrawal from your retirement plan before age 59 1/2 comes with a tax penalty, although there are exceptions. If you’re putting money into your company’s 401(k) plan and the company lays you off in the year you turn 55 or older, you may be able to take the money with no penalty. But that typically only applies to money set aside in that company’s 401(k) plan, not to money you may have left in a previous employer’s plan. It also doesn’t apply if the money is in an IRA.

Remember, too, when focusing on retirement financial planning that savings have the potential to compound over time, so any money you withdraw now won’t be there to grow in the future. Taking out even a relatively small amount—say, $20,000—to get over a hump like an unexpected job loss can cost you many thousands more over the long run and mean less in the bank when you do leave the workforce for good.

Consider Your Alternatives

Job loss is among the more common setbacks individuals of all ages experience, and it may present particular challenges in how to plan for retirement. Or maybe you expected to work until you were 62, but find yourself out of a job at age 45, so major contributions to your retirement savings could be in jeopardy.

“You need to rethink your retirement strategy,” said Dara Luber, senior manager of retirement, TD Ameritrade. “You have to look at your retirement savings and your potential expenses, along with your wants, wishes, and goals. If you have your mind set on retiring early, can you still?” 

What if you lose your job, don’t have an emergency cash fund, and want to avoid taking a penalty or losing interest by withdrawing retirement money early?

Luber said, while chances are you’ll look for another job immediately, some options might include:

• Become an independent consultant or contractor in the industry where you worked.
• Take a side job in an area where you’ve had hobbies (for instance, if you’ve always been a home improvement expert, consider taking a part-time position at a hardware or home improvement store).
• Check into taking Social Security early, although if you are younger than 62, this may not be an option.
• Budget a severance package, if you received one, by using funds to cover your necessities, not non-essentials.  

When contemplating your options, no matter what age you are, you’ll need to consider your current and future expenses to determine how much income you may need to supplement your savings, including the increased cost of health care insurance. Perhaps you have a spouse or partner who can cover you in their health care plan when you are older. If not, private health insurance can be very expensive, and public insurance through the Affordable Care Act may not be a sure thing. Still, you never want to skimp on medical coverage, so it’s not too early to start planning for that expense.

“Make sure to look at your plan at least every year and re-evaluate,” Luber said. “Use the TD Ameritrade retirement calculator to help ensure you’re on track. Life happens, and if your situation changes—such as a job loss, loss of a spouse, and so on—you may want to take a look at your plan and portfolio to see where you might need to make changes.”

Just as the best-built automobile can lose speed if it hits a pothole in the road, the best-laid retirement plan can run into an unexpected setback. Those whose retirement planning includes building emergency reserves and regularly reviewing their plans might have a better chance to emerge more smoothly when life throws them a curveball.

All investing involves risk, including the possible loss of principal. 

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.