By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
One of the most interesting aspects of our jobs is learning the life stories of our clients and prospects.
What we have noticed is that most of us experience bumps in the road to achieving financial security because, as they say, things happen – even to smart, successful people.
Here is a short list of some of the issues that people have faced when trying to achieve financial security.
- Not having a goal
Most people early in their careers don’t identify an amount that they want to have in their retirement accounts when they retire. Instead, they settle on a savings rate they can afford at the time and often don’t deviate from that rate until much closer to retirement. This is a default approach without much planning or specific purpose.
- Lower than expected returns
Returns for diversified portfolios over the past several years have been lower than historical averages. Some of the reason for this is the very low interest rates available on bonds. Lower interest rates have influenced many retirement investors to change their asset allocation and hold fewer bonds and more stocks in their investment portfolios which introduces a wider range of possible outcomes and risk.
Statistics suggest that one in two marriages will end in divorce. Often, especially for women, this leads to considerably lower retirement assets and a lower standard of living in retirement. As the average woman will live longer than the average man, the lower retirement account balance must work even harder.
- Health issues
At some point in their working careers, many will suffer a disability that will be considered “long term” in nature. Even if short- and long-term disability insurance is provided, the amounts that these policies pay will replace basic living costs and usually do not include payments to retirement accounts. To make up for these missed contributions, employees should increase their retirement plan withholding when they return back to work.
- College and education expenses
People who have not saved enough to pay the college expenses of their kids could be tempted to either slow or stop funding their retirement accounts and re-direct this money to schools or other education expenses. Since you only have one “shot” at saving enough for retirement, we suggest that you exhaust all other forms of scholarships, grants and loans (along with work/study jobs for the student) before you either take money from a retirement plan or lower your contribution rate to a plan.
- Job changes
Many millennials have less of a paternalistic relationship with their employers than members of the Baby Boom or Greatest generations. Lack of a perceived career path or impatience about being promoted lead to employees deciding to change employers on a regular basis.
These strategic job changes can lead to higher responsibility and higher salaries. Often these come at the price of having less time to build assets in each employer’s retirement plan. For instance, if (job changer) Tom changes companies every five years during his 30-year working career, and each of his new employer’s forces him to wait a year before he can participate in the firm’s retirement plan (and receive the employer match) then Tom hasn’t saved for retirement during 1/6 of his working life.
- Loss of job
Many of us have relatively little control over our careers. Often decisions that are made by others have a very large influence over one’s ability to save for retirement.
Being laid off or quitting forces you to reset your expectations. You need to start looking for a new position in your town or in another area. Paychecks end and are replaced with much lower unemployment checks. You are no longer contributing to a retirement plan and begin to live on savings and unemployment. Often it takes weeks or months to find another position and then it takes a while to get back on your feet again. Also your new employer will often have a waiting period of up to a year until you can start to save for retirement again. You lose the ability to save for retirement and the earnings you would have made on savings that you didn’t make.
We think that an adequate understanding of your goals and planning for your financial future can help you clear some of these hurdles. Without some form of a plan, when these events happen, many people are make choices that set them back.
Take time to evaluate your options and understand the impact of your decisions.