C.S. Lewis said, “You are never too old to set a new goal, or dream a new dream.” Is it possible he could have known about today’s retirement crisis? The truth is, no matter how much we prepare, sometimes, life happens. The closer we are to retirement age, the more strategy we need to employ to recover. The following are six common life events that can potentially derail your retirement goals as well as recovery strategies.
You Get Divorced
A study conducted by Bowling Green State University showed that the divorce rate for couples over 50 years-old has increased by more than 100 percent since 1990. Ending your marriage once you are past the age of 50 years-old presents a new set of challenges when dealing with finances and retirement. The longer you are married, the more enmeshed your finances become. There are usually more assets to divide, as well as more debt. Compounding this difficult financial scenario is the reality of living with a reduced income.
The Market Tanks
A significant loss in the years preceding or just after retirement will most likely negatively impact the amount of income you will receive over the course of your retirement. Unlike losses that occur earlier in life, there isn’t the same opportunity to recover. Because you have a smaller pool of assets left to sustain you through your retirement years. It’s possible that you may need to postpone retirement or else plan to live below your previous standard. This sequence of return risk can severely impact your retirement.
You Change Jobs
When changing jobs there are certain considerations toward retirement. Benefits may be lost or compromised, as well you must decide what to do with the money you have accrued from your existing retirement account. For the latter, you have three basic choices; when it comes to a 401k:
- Cash out. You will be subject to taxes plus a 10% penalty if you are under 60.
- Roll it over. You can move the money to a 401(k) or a Roth IRA or traditional IRA.
- Leave it where it is. Most employers are required to continue to provide access to your account as long as you have $5,000 vested in the plan.
You Suffer an Illness or Disability
Missed work or diminished wages make it difficult to save and often require dipping into savings to meet monthly expenses. If you are experiencing a long-term illness or facing the possibility of being declared disabled you may need to alter your previous work-life ambitions.
If you experience an injury near the time you were considering retiring anyway, you may think about retiring a little sooner rather than try to get back to work. This may be possible with proper planning, but don’t wing it. Consider the value of your Social Security benefits and whether or not your savings can support you for a longer retirement.
You Experience the Death of a Spouse
When one spouse dies, it makes an immediate impact on retirement planning. Certain assets may be immediately distributed from the estate and may not pass through the estate, even if there is a will. Two examples are 401(k) and life insurance. Both of these will go to the designated beneficiaries, which may be different than the surviving spouse. If the deceased spouse was receiving government retirement benefits, such as military retirement, that will stop immediately, as will their Social Security retirement. However, both have potential survivor benefits.
You Just Don’t Have Enough Savings to Retire
A 2015 survey by BlackRock found that most American’s ideal retirement income was $45,000. However, the average participant aged 55-65 had only accumulated enough in savings to provide a fraction of that amount —$9,129 per year. If these statistics are truly reflective, the retirement gap is indeed enormous. This leaves a massive amount of the population aging – and scrambling to play catch-up.
To determine whether you have enough saved to provide an income for the rest of your life, consider using the 4% rule. Most financial planners agree that if you plan to take out just 4% of your retirement savings per year, you shouldn’t run out of savings. This means if you have saved $500,000, you would need to be able to live on just $20,000 per year. To find out how much you might get from Social Security, head to the SSA website and check out their retirement benefits calculator.
Strategies to Overcome Retirement Setbacks
Each of these scenarios that present a challenge. No matter what age you are when these events occur, your retirement plans will be affected. The main difference is the number of years left to recover from the setback. Some common strategies to help you get your retirement goals back on track include:
- Contribute the maximum to your 401(k)
- Begin contributing to a Roth IRA
- Build equity in your home
Don’t overlook the equity in your home. On average, people over the age of 65 have more than $200,000 in their home’s equity, according to a 2015 Merrill Lynch study. While equity can be fall-back income during your retirement years, if you are upside-down and have little chance of building equity, you may have to consider downsizing. The money savings should go into your retirement account. A lower mortgage or rent payment means your investment will grow faster. And if you are worried about capital gains tax, unless the home you are selling is valued over $500,000, this will not impact you.
Seek Retirement Advice
Look for a financial planner that will take the time to design a retirement income strategy that incorporates your pension, any insurance or annuity vehicles, and traditional accounts to create opportunities for long-term growth as well as provide you with the income you’ll need to sustain your retirement.
Stay Focused on the Long-Term
If you have experienced a setback that is threatening your retirement savings, you probably feel worried and anxious. However, with planning, this is not an insurmountable obstacle. It’s good to remember that your investment time period is over the rest of your life. If you are 45 years old currently, and you live to the age of 90, you’ll have 45 years for the money you have saved and are saving to grow. Remember also, longer investment windows reduce the impact of market volatility, and decrease risk.