In a previous column on planning for retirement, I explained the first 11 risks of 20 things that can ruin your retirement.
That prior article highlighted a variety of investment risks, risks of outliving one’s resources, and risks associated with aging.
As a follow-up to that guidance, below is the remaining list of 20 things that can ruin your retirement.
These ideas are based largely on the quality research of David Littell, RICP Retirement Income Program Director at The American College of Financial Services.
Here are risks you may face in retirement, but have not yet begun to think about.
Risk #12: Forced Retirement Risk
The Problem: In your head, you may be planning to work until reaching a certain age. But in reality, it’s very possible you’ll stop working prematurely due to job loss, poor health, disability, or to care for a spouse or family member.
Any of these events “can quickly derail a retirement plan,” Littell notes.
And don’t think it can’t happen to you.
An MMI study found that 54% of America’s oldest Baby Boomers retired earlier than planned, with 32% citing health reasons and 25% citing job loss. Research from the Employee Benefits Research Institute reinforces those findings. An EBRI study revealed 47% of people retire earlier than planned, including 55% due to health or disabilities; 20% due to downsizing or closures; and 23% attributable to care-giving responsibilities.
Solutions: Although downsizing is not in anyone’s control, keeping your skill set up to date may somewhat diminish the risk of a layoff. Save more aggressively as well, stashing away more dollars and creating a contingency plan to deal with job loss under various scenarios. Also, bone up on employer benefits available in the event of downsizing.
Risk #13: Re-employment Risk
The Problem: Although many retirees plan on working in retirement, it often simply doesn’t work out due to a tight job market, diminished health or care-giving responsibilities.
According to EBRI data, 69% of retirees expected to work during retirement, yet only 25% of them were actually working in 2013.
Solutions: If finances dictate doing so, consider postponing retirement and sticking with your current employer. After you enter retirement, to get back into the workforce and land a job sooner, be open to learning new skills and considering a variety of opportunities.
Risk #14: Employer Solvency Risk
The Problem: You may be so worried about your own financial problems that you’ve never seriously considered whether your employer is also ailing economically. But companies go out of business at all the time. And financially troubled firms that do manage to stay afloat may be so economically unstable that they’re no longer able to provide previously promised retirement benefits.
Solutions: There isn’t much public workers and others can do if their employers’ pension plan goes belly up or is on the verge of collapse. Luckily, most pension plans in the U.S. are fine — despite well-publicized problems and pension fiascos like the city of Detroit.
If you work for a private employer, avoid loading up on your company’s stock. That way, at least you shield yourself from the double whammy of potential job loss and being invested in a business whose stock might tank as well.
Risk #15: Second Act Risk
The Problem: Many people, after downsizing or quitting unfulfilling jobs in their 40s or 50s, take on expensive new venture during the “second act” or “second half” of their life. Whether it’s launching a new business or starting a non-profit entity, these initiatives can drain retirement assets. In fact, Bloomberg recently reported on the increase in risky business start-ups for older adults.
When I asked Littell about this phenomenon and suggested adding this risk, he said: “This trend does concern me (because) many small businesses fail and risking your retirement savings on a new business near retirement age is extremely risky.”
Solutions: Even if you’re a more risk tolerant entrepreneur, factor in risk capacity too. Be aware that “when your future earnings capacity is low (at the end of your career), you have less capacity for taking risk with your financial assets. When you’re young if you take a loss on financial assets you can make it up by working more and saving more,” Littell notes.
Don’t put an excessive amount of your financial resources in a start up—that’s the equivalent of owning one very risky stock.
Identify your realistic retirement income needs and assess whether or not you can truly afford a “second act” activity. Working with an advisor can aid you developing the right overall plan and staying on track financially.
Additionally, buying annuities can help those who want to meet both security and self-satisfaction needs. “If you also want to lock in legacy goals purchase life insurance as well. Then you’ve taken care of income needs and legacy goals—and can spend the rest on what ever gives you satisfaction without risking financial security,” Littell says.
Risk #16: Loss of Spouse Risk
The Problem: The death of a spouse is obviously a major personal blow. But it can also have enormous negative financial implications for those who haven’t planned.
Within five years of a spouse’s death, 40% of widows fall into poverty due to lost pension, Social Security or other income.
Solutions: If you’re married, always factor the surviving spouse into the equation when doing retirement planning and financial decision-making.
Begin by obtaining sufficient life insurance to provide an adequate payout to a widow or widower. Also, make Social Security decisions that maximize the survivor benefit.
Choose joint-and-survivor options (not a single-life annuity) when electing pension benefits. Littell says many people opt for a single-life pension payout to boost monthly income, but upon their death that pension benefit completely ends, hurting the finances of a surviving spouse.
Finally, make sure adequate estate planning has been done so that wills, trusts and beneficiary designations properly protect a surviving spouse.
Risk #17: Divorce Risk
The Problem: Although I’m only in my 40s, I’ve been through a divorce and I know from first-hand experience the economic toll that divorce can take. For those closer to retirement, the breakup of a marriage can be especially taxing financially. So I pointed this out to Littell and suggested that divorce be seen as a retirement risk – especially since, unfortunately, divorce after age 50 is getting more common.
Consider these statistics: a half century ago, only 2.8% of Americans older than 50 were divorced. By 1980, that figure nearly doubled to 5.3%. Fast-forward to 2010, and divorced and separated older persons grew to 12.4%. A year later, in 2011, the tally surged to 17.5% according to the Census Bureau’s American Community Survey, which found that 15.4% of folks aged 50-plus were divorced and another 2.1% were separated.
Bottom line: the possibility of a late in life divorce is strong reason both partners in a marriage need to understand and be involved in family finances.
Solutions: Separation and divorce are already stressful enough. Don’t make things worse by seeking financial revenge or making certain common financial mistakes during divorce.
Instead, each party should get educated about how Social Security works, Littell suggests. For a nonworking, low earning, or short work career spouse, the spousal benefit will be an important part of their retirement income. “It is only available when the marriage lasted 10 years — so hold out one more year if it’s only been nine — and if the individual is unmarried,” says Littell.
Even for a divorced spouse with a substantial worker’s benefit, the divorced spousal benefit can be claimed at full retirement age, allowing the individual to defer worker’s benefits to age 70 and earn deferral credits.
Lastly, resist the temptation to spend retirement resources after a divorce. “Setting up a new household, moving expenses, and other start-up expenses can seem like a good reason to raid a retirement account,” Littell says. But don’t do it. “Clearly, planning for two households is going to be harder than planning for one,” he adds.
Risk #18: Planned or Unplanned Family Responsibility Risk
The Problem: Millions of pre-retirees and current retirees face family obligations that threaten their retirement readiness. This risk ranges from parents who are paying for their children’s sky-high college costs (which is sometimes a planned expenditure) to parents who are unexpectedly aiding their adult children or letting them move in after those offspring go through job loss, divorce or other difficulties.
The scenario of retirees coming to the financial rescue of relatives happens far more often than you might suspect.
More than six in ten (62%) of Americans age 50 and older provide financial support to family members, and AARP reports that 5.8 million children live in their grandparents’ homes.
Solutions: Balance family needs with retirement needs. Don’t give until it hurts, by sacrificing your retirement or putting yourself in the hole financially. Take time to have important conversations with relatives and manage expectations on all sides. Realize that “giving too much can lead to financial dependence on children later,” Littell says. Also manage the risk of unexpected obligations by learning to establish financial boundaries and knowing how and when to say “no” to family and friends.
Risk #19: Timing Risk
The Problem: A variety of events – none of which are in your control – can have a major impact on your retirement depending on how and when these occurrences play out. Some key timing risks, also known as “point-in-time” risks, include: retiring amid high inflation, low interest rates or during extreme stock market turbulence.
Case in point: during the Great Recession which peaked during 2008 and 2009, Baby Boomers lost more of their wealth than any other group impacted by stock market volatility and the housing bust. Many Boomers also suffered job loss, compounding their financial woes.
Because they don’t have the pensions their parents typically had, more than half of all Americans between the ages of 50 and 64 think their retirement standard of living will be somewhat or much worse than their parents’, according to an AARP Public Policy Institute survey.
Solutions: The best ways to slash timing risk are to diversify your investment portfolio, work with a financial advisor, and continually monitor your financial plan to make sure you’re on target to reach your retirement goals – regardless of ever-changing market conditions or market crises that may erupt just as you’re on the verge of retiring.
Risk #20: Public Policy Risk
The Problem: Just like you can’t control timing risk, you can do little about tax laws that suddenly change, government programs (like Social Security or Medicare) that get overhauled or employer-sponsored retirement benefits that gradually erode or disappear altogether as you’re on the cusp of retirement.
Solutions: Keep abreast of key economic, political and workplace issues that could impact you financially. Do some “what if” planning around potential changes that may thwart your retirement plans. Finally, favor tax-free investments, such as municipal bonds and Roth IRAs to stack the deck in your favor on the tax front.
The Time to Act is Now
As you can see from this list and prior list of 20 things that can ruin your retirement, there are many potential retirement risks you should address now – while you’re working, or as you transition to retirement, in order to ensure your long-term financial security.
And here’s the gospel truth about ignoring this advice and doing nothing: If you let inertia, procrastination or even today’s worries keep you from adequately planning for retirement, you’ll pay a very steep price for such neglect down the road.
You don’t want to spend your latter years in poverty, or perhaps living in a friend’s basement, like this 61-year-old woman named Lee Manchester who was profiled by Bloomberg Businessweek.
Unlike her 87-year-old father, who is financially stable, travels, and has the benefit of pensions and an $800,000 retirement nest egg, Manchester suffered from bad timing and a host of other retirement risks – several of which could have been mitigated by better financial decision-making and more prudent retirement planning.
So don’t delay in getting your retirement plans in order. Get started today – before you wake up years from now, in your 60s or 70s, and wonder where all the time went and what you have to show for all your years of hard work.