Signs you're going to retire broke
Americans fall behind on their savings for retirement for many reasons. A job loss, financial emergency, divorce or the death of a spouse can derail retirement plans.
Whatever the reason, and whatever your age, it is important to get back on track. Here are some warning signs that you are not saving enough for retirement and are at risk of retiring broke.
1. You Don't Have Enough Cash in Your Portfolio
Cash is handy to have on hand as a cushion for the unexpected, said personal finance writer Julie Rains. "If you have cash available for emergencies, you can avoid tapping a home equity line of credit or putting charges on a credit card," she said. "You may also be able to avoid selling investments when the market is down just to pay for a new roof or furnace."
Rains recommends setting aside money in a savings account that you pledge not to touch for day-to-day needs or wants.
2. Your Portfolio Is Overweight With Employer Stock
Rains acknowledges that in some cases, employer stock can make workers wealthy and give them the means to retire. But she cautioned that it can be risky to have too much of your portfolio dedicated to one security. "Consider diversifying your holdings prior to retirement so a severe decline in your employer's stock price won't wreck your retirement plans," she said.
Not only does too much employer stock expose you to market risk, but a downturn in the company can result in a job loss. So, you could lose your nest egg and job at the same time. Too much company stock is the ultimate example of putting too many eggs in one basket.
3. Balances Are Growing on Your Credit Cards
Growing balances on your credit cards are surefire signs you are going to retire broke, said Benjamin Brandt, a certified financial planner with Capital City Wealth Management in Bismarck, N.D.
Many people who aren't consistent with their family budget turn to credit cards to pick up the slack, he said. "Sure, you can always pick up an extra shift or work overtime to pay off your debts," he said. "But the bigger picture is that your lack of a budget is robbing your retirement of new contributions."
Brandt urged investors to ditch the credit cards, get on a budget and contribute large amounts of cash to retirement accounts.
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4. The Majority of Your Net Worth Is Tied Up in the Home
Paying off your mortgage and retiring debt-free is a "huge accomplishment," said Taylor Schulte, a certified financial planner and founder of the San Diego-based fee-only financial planning firm Define Financial. However, he added that it can be tricky to put together a retirement income strategy if most of your assets are locked up in your home.
"If the equity in your house represents more than 50 percent of your net worth, it could be a sign that you're going to retire broke," he said.
A home is a great place to raise a family and live your life, but it is an illiquid asset. And as the Great Recession showed, housing can be a risky financial asset. It is not a good idea to tie up the majority of your net worth in your home.
5. You Forget About Inflation
Most people tend to take less risk as they close in on retirement. That isn't a bad thing, but it does present some risks, said Clint Haynes, a chartered mutual fund counselor and founder of NextGen Wealth in Lee's Summit, Mo.
"You still have to remember that inflation can have a major impact," he said. "Remember, inflation has averaged around 3 (to) 4 percent over the long term. So if you're not earning at least that much, you're actually losing ground."
So while it's fine to "take some chips off the table the closer you get to retirement," you need to understand the effect inflation can have on your purchasing power, Haynes said.
Make sure your investments provide you with the potential to earn returns in excess of inflation.
6. You Are Still Waiting for the Right Time to Invest
A lot of people are behind on retirement savings because of other pressing financial matters, said Vic Patel, the New York-based founder of Forex Training Group. He offered a warning to people in their 30s and 40s.
"You are very likely to retire broke unless you make a serious effort to start putting some money away every month into a retirement account and let those funds compound over time," he said.
7. You Load Up on Bond Funds
People purchase bond funds when they are looking for a safe way to get returns. However, bond funds can be somewhat risky when interest rates rise and the bond funds lose some of their principal value, said Charles C. Scott, president of Pelleton Capital Management in Scottsdale, Ariz.
"Picture a teeter-totter," he said. "On one end sits interest rates, and on the other end is principal value."
Since 1982, interest rates have gone down, so principal values have gone up, Scott said. "Interest rates are at or near historical lows, so when that reverses direction, values will go down."
The duration of a bond fund will have a big impact on how much-rising interest rates will damage returns.
"A fund with a duration of 6.5 years will lose principal value of approximately 6.5 percent for every 1 percent increase in long-term interest rates," Scott said. "It's just bond math. Know what will happen when interest rates go up and take appropriate steps."
8. You Take Distributions From a 401k Plan When Leaving an Employer
In today's world, it is common for workers to have several jobs during the course of a career. When you change jobs or otherwise leave an employer, it is important to manage your old retirement plan account. Your options might include:
- Rolling your balance into an IRA account
- Rolling your balance into a new employer's 401k plan
- Leaving your balance in your former employer's plan
- Taking a distribution
Taking a distribution triggers a tax bill. If you are under age 59 ½, you will pay an additional 10 percent penalty. Moreover, taking distributions can be a big retirement planning mistake, because it means this money isn't working to build your retirement nest egg. In fact, spend enough of this money and you could be left with no retirement savings.