How to Manage the Bumps in the Road to Retirement

Roadblocks-to-Retirement-AheadA new TD Ameritrade survey says that bumps and detours along the road to retirement are the norm, not the exception, with two-thirds of Americans claiming their retirement planning has been disrupted by anything from major health bills or bouts of unemployment to business setbacks or divorce. The toll in lost retirement savings: an estimated $2.5 trillion. Still, however predictable the results, studies like this can still serve a useful purpose by reminding us of something we should already know but often forget: namely, that we’ll have a better shot at weathering and recovering from financial disruptions if we factor them into our planning ahead of time.


The article, titled “Retirement Interruptus: 3 Ways to Prevent Disruptions From Derailing Your Retirement Plans,”from the website Real Deal Retirement, gives us three ways to stay on track along the road to retirement:


1. Consider Alternate Retirement Realities. Remember that an assessment of your retirement prospects from a retirement calculator doesn’t mean that your retirement’s going to go precisely to that plan. Just like the weather forecast, things can change. “The best-laid plans of mice and men…”


With that in mind, you should run through a variety of different scenarios to get a feel for how you might do under a variety of different conditions, such as higher inflation or lower investment returns. The article suggests you look at some worst-case scenarios like extended unemployment when you aren’t able to save, forced early retirement, or an accident with large medical bills or other expenses in retirement that can take a big bite out of your nest egg.


2. Make Certain You Have a Safety Net. Once you have an idea what one of these alternatives may look like, look for ways to alter your planning to mitigate some of the possible damage. The thought most people have is to boost savings balances by investing more aggressively. This may be okay if you’re currently investing very conservatively (for example, with CDs and bonds). However, if you already have a very well-balanced portfolio that works with your risk comfort level, getting more aggressive could backfire and leave you even more vulnerable to a market crash.


If you’re still working, the article advises that a better route is to look for opportunities to save more—even if you’re very near retirement. You can still try to save a little more of your salary each year, which can significantly boost retirement account balances and make it easier for you to recover from a setback. This is backed up by the survey, which found that people who’d experienced a financial disruption said that saving a greater proportion of income (44%) and getting an earlier start on saving (36%) were the things they suggest to others in a similar situation.


If you’re already retired, spending less is the focus, instead of saving. Examine how you can eliminate spending without creating a major negative impact on your standard of living. Create a retirement budget that divides your spending into essential and discretionary categories to see what kind of wiggle room you have and identify possible areas to cut.


3. Get Going! If you have had your retirement planning disrupted, take corrective action right away. Waiting with the hope that the setback may just be temporary or that you might be able to fight your way through without changing things is just going to make it worse. The article suggests reducing spending, and that’s what 79% of the people in the survey did. However, for many—particular those who are unemployed—the retirement contributions may be one of the first things to go. Using your savings should always be a last resort, and if you must do this, try to pull money out of your non-retirement accounts first. If you are forced to tap retirement accounts, try to minimize your taxes and early withdrawal penalties.


If you have a set-back when you’re retired, immediately analyze your retirement budget and pinpoint ways to cut back your withdrawals. The article warns that if you experience a hit to your nest egg—especially early into retirement—you can significantly increase the odds of running out of money during your lifetime. Remember to work those retirement calculations to get a sense of what level of spending you can reasonably expect to maintain without going through your money too quickly.


We all know that every road has some bumps and potholes, and some can’t be avoided. Talk with an experienced estate planning attorney and create a solid plan with some “what ifs” baked in for your retirement. If you add these into your planning and respond quickly if they occur, you should be able to minimize the damage.


For more information about estate planning, please visit my estate planning website.


Reference: Real Deal Retirement, “Retirement Interruptus: 3 Ways to Prevent Disruptions From Derailing Your Retirement Plans.”


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