In the wake of the market meltdown that began nearly five years ago, a huge bull market in stocks has helped rescue many retirement investors from the brink of ruin. Yet even with the support of the stock market, many Americans still report big losses in their retirement savings -- we're talking six-figure declines -- and they're blaming unanticipated life events that have affected their ability to achieve their financial goals for retirement.
Major unexpected events have hit 90 percent of Americans between the ages of 50 and 70 with at least $100,000 in investable and retirement assets, according to the Retirement Derailers survey from Ameriprise Financial.
The survey found that typical respondents suffered an average of four such "derailers," and the cost was substantial, causing total average losses of $117,000. For the 37 percent of respondents who said they went through five events, the total losses were even larger, averaging $144,000.
Given the stock market's huge plunge in 2008 and early 2009, you might expect that it would be the most commonly cited derailing event. But surprisingly, the most common derailer was the low interest rate environment, with 63 percent of those surveyed blaming low rates in hampering retirement-portfolio growth. Another 55 percent pointed to the stock market's decline, while 33 percent cited the plunge in home prices as wiping out a big chunk of their expected home equity.
Yet market forces weren't solely to blame for financial difficulties. Job loss hit 18 percent of those surveyed, while 23 percent point to the need to support adult children or grandchildren as hampering their finances.
Are Boomers In Denial?
As troubling as those figures are, what could be even more problematic is the extent to which Americans don't fully realize the impact that major losses will have on their retirement.
Only 35 percent believe that derailers will hurt their capacity to pay essential living expenses a lot or a fair amount. It takes several major disruptive events to get the point across, as 60 percent of those who dealt with five or more derailers expected greater difficulty in paying for essentials.
Moreover, American baby-boomers don't seem to understand the importance of actually staying on pace to achieve the goals they've set for their retirement finances.
More than 60 percent still think they're on a "smooth" road to retirement rather than a "bumpy" one. Yet, 42 percent say that their investment portfolios have left them with less than they expected 10 years ago to have by now, and more than 55 percent of those who've suffered an unexpected event describe the impact it has had on their finances as extremely serious or somewhat serious.
Lessons For the Future
The Baby Boomers surveyed here haven't given up hope and they plan to take action on their own to help get their finances in better shape.
But what future generations can take from Boomers' opinions is the lesson that paying attention to your money earlier in life can make a big difference in how your finances look by the time you approach retirement.
In particular, 57 percent said that they would have started saving earlier if they'd known how difficult it would be to handle unexpected financial challenges. Another 37 percent think that knowing more about investing at an early age would have helped them avoid their current fate, while 33 percent pointed to overspending on vacations and restaurants as contributing to their woes.
It's never too late to start working to get yourself in better financial shape. For those who have already retired, adjusting the investments you already have to make better use of income and growth opportunities can help you stretch your portfolio as far as it'll go. Boomers who are still working have an chance to boost their savings and take advantage of the final years of their career to try to get back on track.
Still, the sooner you get a grip on your finances, the easier it is to get yourself where you want to be by the time you retire. The Ameriprise survey is just one more piece of evidence showing how important it is plan for your future as early as you can.
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Think again. Even student loan debt can chase you into retirement.
The Treasury Department has been withholding as much as 15% of Social Security benefits from a rapidly growing number of retirees who have fallen behind on federal student loans -- five times as many as in 2001. Even something as simple as credit card debt can hurt you in retirement, says John Ulzheimer, president of SmartCredit.com.
"When it comes to credit card debt, you absolutely have to get out of it before you hang up your company badge," Ulzheimer says. "It's very likely the most expensive debt you're carrying at 13 percent to 15 percent interest on average, and twice that in some cases. No retirement nest egg can guarantee that kind of growth."
Leaving the workforce might help you cut costs in some areas -- for example, your pricey commute to the office -- but you can never underestimate the cost of aging.
"Many studies show that some retirees even spend more in retirement than they did when they were working," says Susan Garland, editor of Kiplinger's Retirement Report.
"In the early years, you may be embarking on long-delayed travel and hobbies. And as the years go by, your health care costs are sure to rise. House-related maintenance costs, insurance and property taxes are sure to be on the upswing as well."
"More and more Americans say they plan to pay for retirement by working longer, but in reality, many retirees end up quitting sooner than planned," says Greg Burrows, senior vice president for retirement and investor services at The Principal.
One third of American workers said they plan on working past age 65 in a recent survey by the Employee Benefit Research Institute, but more than 70 percent of retirees said they actually quit before that milestone.
Then there's the job market to consider, which doesn't take kindly to workers who are past their prime. In 2011, the median length of unemployment for people 55 and older was 35 weeks, up from 10 weeks before the recession, according to the Government Accountability Office.
Medicare is an excellent resource for retirees needing health care support, but here's a wake up call: It doesn't cover all long-term care.
Medicare coverage excludes extended nursing home stays, custodial care, or an in-home nurse to help out if you're unable to dress, feed or bathe yourself.
"Medicare pays for limited nursing-home and home-health care for short periods to provide continuing care after a hospital stay," Garland says. "For example, skilled care in a facility is limited to 100 days. It may be wise to consider long-term care insurance to cover those costs."
Never underestimate the crippling power inflation has over your retirement savings.
"Too many people have the illusion that money is safe as long as the balance doesn't go down, but the reality is that inflation will eat into your purchasing power unless you learn how to properly manage and invest your wealth," writes David Ning of MoneyNing.com.
"Those who put all their money in a savings account may not experience the volatility that comes with different investments, but they are sure to be able to afford less and less as years go by, which is a real threat too."
Contrary to popular belief, investing savvy isn't something only the rich are born with.
But if you want to invest wisely, do yourself a favor and leave the stock picking and day trading to the professionals.
"Stick to the boring but effective strategy of saving early and often, watch investing fees, and picking an asset allocation plan where you can stay the course when the market inevitably takes a dive," says Ning.
And start as early as possible. According to personal finance expert Kimberly Palmer, someone who begins investing at age 25 will only have to save $4,830 annually to reach $1 million by age 65, accounting for an annual return of 7 percent after fees.
That figure triples to $15,240 if you wait until your 40s.
At some time (and for a lot of you, many times), life eventually will get in the way and you'll find yourself on the wrong side of your bank or, worse, a debt collector.
Stand your ground and watch them like a hawk. That means reading the fine print before signing up for a high-interest, high-fee credit card and taking a proactive approach to lower your interest rates on credit and mortgage loans. Sometimes, all it takes is a phone call and a little math work to figure out you could be getting a better deal elsewhere.
When in doubt, think about Kenny Golde, a 40-something producer we spoke with last year. He managed to negotiate $220,000 worth of debt down to $70,000 on his own.
It turns out one in four workers resorts to taking out 401(k) loans each year, to the tune of $70 billion, nationally.
"You might be cheating your future self," says Catherine Golladay, VP of 401(k) Participant Services at Charles Schwab. "While paying back a 401(k) loan, many people stop saving in their 401(k) plan, which can really derail retirement savings."
And don't forget about the fees. Workers under age 59 1/2 who dip into retirement funds must generally pay back their loan quickly, between 30 to 90 days in most cases. Otherwise, you could wind up paying income taxes on whatever you've taken out, along with a 10 percent early withdrawal penalty. And you still have to pay back the loan with interest -- and with after-tax money, which then gets taxed again when you withdraw it in retirement.
We'll never tire of the Roth vs. Traditional 401(k) debate. With a Roth 401(k) or Roth IRA, all of your contributions are taxed immediately according to whatever tax bracket you fall into today. Traditional IRAs are tax-deferred until retirement.
The general consensus is that it's better to convert to or start a Roth now, since it's likely that you will wind up retiring in a higher tax bracket than you occupy now, in which case you'll pay significantly more in taxes later than you would today.
But investors who've already built a substantial IRA or 401(k) often can't stomach the thought of paying taxes on everything at once if they make the switch.
"Sometimes it just takes a lot of handholding because investors don't like to write that check," says Janet Briaud, chief investment officer of Briaud Financial Advisors. "There is sticker shock, but in the long-term, our clients really get it. They're really happy."
Ultimately, that money will be taxed one way or the other, either starting at age 70 1/2 when required minimum distributions take effect, or during the life expectancy of the beneficiaries, she argues. And if you leave a Roth IRA to your loved ones, you'll have the peace of mind of knowing they won't have to pay taxes on the money they withdraw.
To help ease the blow, speak with your advisor and try a partial conversion by moving just part of your savings to a Roth each year.
"Start by estimating your post-retirement expenses. Average it out across a year. From there, estimate what sort of investment returns you'll be able to generate -- yes, you'll need a crystal ball for this.
"From there, divide that rate (as a decimal) into one to find your multiplier. So, for example, if you think you can generate 4% real returns (i.e., 4% returns after accounts for inflation, so more like 7% nominal returns) then you'll need 25x your annual expenses (1 / 0.04 = 25). If you think you'll only be able to generate 3% real returns, then you'll need 33x your expenses. And so on."
The benefit of saving for your children's college education early (ideally via a 529 plan) is that you limit your saving burden by spreading it out over time.
But even if you come up short of tuition costs, don't immediately dip into you retirement savings to make up the difference.
"You can always fall back on financial aid. Grants, scholarships and student loans can help pay your child's way," writes Learnvest's Laura Shin. "When it comes to your retirement, however, there are no loans."
Of course, few people have the benefit of unlimited cash flow without putting in a little leg work first. But there are higher priorities in life than working overtime and depriving yourself of a few pleasures today just to save a buck or two.
"People spend most of their time planning their finances for old age, but not their fulfillment" along the way, says Ken Budd, executive editor of AARP The Magazine.
"We once profiled a man who decided that for the first year of retirement he would do whatever he wanted. So he went for long walks, he skimmed the newspaper online, he sat in Starbucks and read Grisham novels. But after that, he [felt so bored] he decided to become a chaplain."
Without a plan in place, you could leave your estate's future in the hands of squabbling family members or your state, which would appoint an administrator to handle everything.
"[A will] enables you to start thinking about issues like whether you have the right insurance coverage, life insurance, and ways of replacing your lost income," RocketLawyer founder Charley Moore says.
This is doubly important for gay spouses, as states that don't recognize gay marriages would pass over same-sex spouses in favor of next of kin.