Life is full of unexpected situations that may have required you to pull from your retirement savings to cover pressing, unanticipated expenses. Although such situations can present challenges to the integrity of your retirement fund, there are several things you can do to reinvigorate your savings.
First, identify what caused the drain in your retirement savings. This step may seem obvious, but it’s important to take time to evaluate the factors that led to your emergent situation so that you can take steps to avoid them again in the future. With time and careful consideration, you can prepare for future unexpected situations.
Generally, it is advisable to save cash reserves to cover expenses for anywhere between three and six months. If you’re a homeowner, you should be able to cover six to 12 months. In addition, you should keep the amounts of the deductibles for your homeowners, flood, car, and health insurance. As an added precaution, set aside 1 percent of your home’s value each year for repairs.
Next, cut expenses and prioritize retirement. Because people spend the majority of their careers thinking that retirement is far away, other more immediate expenses often take priority over saving for a seemingly distant eventuality. However, dipping into retirement savings to cover an emergency signals that spending less on lower priority expenses may be necessary in order to recoup your losses. To help you accomplish this, refer back to the first step and evaluate what expenses you can minimize or maybe live without (at least for a while). Finding tax preferential vehicles such as municipal bonds, MLPs, and real estate in addition to the retirement accounts you already hold can help you get back on track as well.
Start saving small amounts to develop good saving habits and begin replenishing your retirement fund. Easing into monthly saving can help you get your retirement savings back on track without presenting you with a harsh burden. Starting by saving just 1 percent of your annual income in a company retirement plan helps you form a habit of saving. The 1 percent amount is small enough that it won’t be missed but big enough to keep the need to save for retirement fresh in your mind. It also helps you to save more as time goes on. By increasing the amount you save by an addition 1 percent of your income every other month, you will quickly be on your way to substantially rebuilding your retirement savings.
Eventually, you should increase your contributions to company retirement funds to the maximum amounts allowed by your 401(k)s and IRAs. Taking advantage of matching employer contributions will also be beneficial. If you are aged 50 or above, you can also potentially take advantage of up to $1,000 in catch-up IRA contributions and up to $6,000 for catch-up 401(k) contributions.
Pursue an extra job or income-generating side project to help fill in the gap.
Picking up a second job or an extra client or two can help generate additional income that can be set aside for retirement without impacting present-day expenses. If your spouse or partner does not work, having him or her join the workforce can be a great boon. Alternatively, if you are already retired, consider turning a hobby into an income-generating project. Or, apply to a big company, whose employee insurance plan can help cover healthcare costs. However, if you are unable to pursue any of the examples above, even simple things like tutoring or helping neighbors with some yard work can help supplement other income.
Delay retirement and social security to make sure you have more money for later. The best way to improve a retirement portfolio’s longevity is to delay drawing on it. Delaying retirement allows more time to build greater savings and also ensures that saved funds that you have accumulated will last longer into the future because they are being drawn on later in time. If you delay your social security benefits until after retirement age, your benefit grows with each year of delay.
If you’re a homeowner and your home has sizable home equity, consider a reverse mortgage. A reverse mortgage allows people aged 62 and over to receive tax-free cash in a lump sum or fixed payments. Moreover, the mortgage does not need to be paid until the homeowner moves out or dies. However, there are closing costs associated with this type of mortgage, and the homeowner must maintain the home. Although seniors often consider a reverse mortgage to be a last resort, it is a viable option provided that it is obtained from a reputable lender and that the homeowner understands how the mortgage works.
Many economists agree that the personal savings rate in America is too low. Even though it climbed to 5.7% in late 2016, it’s still behind most other developed countries.
For instance, Switzerland households save 13.4% of their income. In Japan, workers have averaged a savings rate of 11.74% from 1970 to 2016.
For those looking to save more, what’s the solution? Obviously, making more money helps, but that may not be entirely possible for everybody.
What anyone can do right now is manage their budget better. Smarter spending equals higher savings—a good step towards ensuring a secure financial future. Here are 4 reasons why considering the impact of spending is just as important as saving.
1. A penny saved is still a penny earned
Benjamin Franklin’s famous quote is simple but profound. Anybody that’s worried about their financial well-being should remember it. Say it out loud, “A penny saved is a penny earned.”
Though most are familiar with this quote, it’s not being put into practice the way it should be. According to research from GOBankingRates, one in three Americans don’t have any retirement savings.
Cameron Huddleston, an expert columnist at GOBankingRates, believes this can be fixed. “There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement,” she says. But things likes student loan debt, low wages, and a child’s education “don’t necessarily make it impossible to save for retirement.”
For those on a strained budget, the best way to save more money is to look at how you’re spending. There are many easy ways to save a few or even hundreds of dollars a month, from cutting the cord on cable to bargaining at flea markets.
2. Overspending carries future financial consequences
According to a study published in the Journal of Consumer Research, consumers overspend due to impatience and not thinking about long-term consequences. Examples of this play out every day.
For instance, 30-year olds probably don’t think about how buying a super-expensive TV today could negatively impact their quality of life at 65. That’s just so far away, and that TV can offer immediate pleasure.
This is what motivated the study’s researchers, Daniel M. Bartels and Oleg Urminsky, to look for ways to change this behavior. The two University of Chicago professors found that the solution is more complex than just thinking about one’s future self. While spending money, people must also care about their financial future. If someone doesn’t care, then spending less and saving more becomes less likely.
As Bartels and Urminsky say, “The best way to help consumers avoid overspending is to get them to both care about the future and recognize how their current behaviors affect the future.” Thinking and caring about the future is key to spending wisely today.
3. There is waste everywhere
Think of something like lean management in business. The core idea is to eliminate waste and improve efficiency. People should be applying this philosophy to the way they spend money.
Many may argue that saving is tough because all their income is spent on essentials, but research doesn’t necessarily support that claim. A survey by 24/7 Wall Street found that Americans spend roughly 15% on non-essentials (which means $15 out of every $100 doesn’t necessarily need to be spent).
Some common non-essentials include the following:
Eating out at restaurants
It’s worth noting that things that can be classified as “non-essentials” offer necessary relief from the stresses of life. Yet the fact remains that this is the primary area where wasteful spending occurs. Cut down any wasteful spending here and savings rates rise immediately.
4. Overspending leads to debt
It shouldn’t be a surprise that student loan debt can delay saving for retirement. It’s hard to stash away cash when lenders need those monthly payments.
For those that overspend and get caught in debt, the same idea applies. Habitual overspending makes getting out of debt—and saving—quite difficult.
It’s rather alarming that the average credit card per U.S. household is around $16,000. This indicates consumers are buying things without having the ability to pay in full. Carrying a credit card balance is necessary sometimes when the unexpected arises. But for many, high balances are simply a result of bad money management (overspending).
Also, since credit cards have higher interest rates, this means people are getting burnt by interest payments. That interest money could have been savings instead.
Saving more by spending wisely
In the end, it’s not necessarily about being stingy. It’s about spending more wisely. This means buying things at the lowest possible prices, staying away from unnecessary purchases, keeping credit card balances as low as possible, and more. If more folks start to pay attention to the impact of their spending, they’ll see their savings rise.
Providing for children when they are young is a common expectation. However, the situation gets more complex as children grow into adults but continue to need financial support. Known as “boomerang kids,” these children, aged 21 years or older, either live with their parents or continue to receive financial support even when living on their own. Parents want to help their children through the weak post-Great Recession entry level job market, but such assistance comes with the added cost of decreased savings and later retirements.
According to new data from the Pew Research Center, for the first time in 130 years, more young adults aged 18 to 34 live in their parents’ homes—32.1 percent of them—than on their own or with romantic partners. In such situations, parents often need to divert funds from retirement investing and saving to bear the added cost of providing for their adult child. A 2015 study conducted by Time Magazine revealed that, regardless of whether adult children live with their parents or not, 70 percent of parents polled spent up to $5,000 per year supporting an adult child, with 38 percent reporting having spent at least $1,000. Two-thirds of respondents aged 50 and older also indicated that they had provided financial support for a boomerang child within five years prior to taking the survey.
Such amounts may seem small, but they add up quickly, especially at a time when parents should be actively working on accumulating wealth and diversifying their income streams as part of their retirement strategy. Although parents and adult children both feel that assistance should not go on for long, the reality is that it stretches over longer periods of time than anyone is comfortable with. Even if parents spend just $1,000 on their adult child per year, the sum they lose from their retirement savings is even greater when they account for the loss in market-tracking index growth should that sum have been invested instead.
In addition to decreasing the amount of investments and savings, spending money to help adult children also results in people putting off their retirement. A study by Hearts and Wallets revealed that parents aged 65 and older who have financially independent adult children are twice more likely to be retired than their counterparts who are supporting adult children.
To help offset the financial burden of supporting a boomerang child, parents can set expectations and boundaries. Parents can ask boomerang children who live with them to pay rent or contribute to household spending in other ways. Regardless of whether their children live with them or not, parents can also help themselves and their children by assisting their kids with networking so that they can find a well-paying job and become financially independent. Setting boundaries and creating a plan for when a child will move out or assume increased financial responsibility can also be helpful in keeping parents’ spending in check. Finally, assigning household maintenance responsibilities or other chores may free up parents’ time to turn to turn their attention to financial matters.
Of course, each situation is unique, so there is no one size fits all strategy. Some boomerang children may be unable to secure a well-paying job while others are crushed by crippling student loan debt. Nevertheless, parents should strive to keep their retirement strategy in focus so they don’t run the risk of outliving their assets or having to ask their adult children to care for them later in life because parents spent their retirement savings providing for their adult children today.
photo credit: Wikidpedia
Even as they enter their 50s and 60s, couples tend to avoid discussing their retirement. Although the subject can be uncomfortable because it touches on the end of life, not talking about retirement often leads to problems, both financial and domestic. To ensure that you and your partner are both well taken care of when you choose transition from the workforce, we recommend that you discuss the topics outlined below as early as you can.
- When do you plan to retire?
Because this question impacts both finances and lifestyle, it can often be the most difficult one for couples to resolve. Your partner may wish to retire early after a prosperous career, but you still feel satisfied in your work and are not yet ready to leave it behind.
The best way to get past a potential roadblock is to examine the impact one partner’s earlier retirement will have on your mutual financial situation. Having one partner remain in the workforce can increase retirement savings, grow your employer-sponsored pension, and delay taking out social security benefits, which can be helpful in making sure that neither of you run out of money once you’re both fully retired. Having one partner keep working may be especially beneficial in light of the fact that women are expected to live as much as 10 years longer than men, which could result in their living past their retirement savings.
- Where do you plan to retire?
This question impacts the kind of lifestyle you and your partner might want. Talk about your interests and the activities you wish to pursue in your free time. Depending on whether you’d like to live in a pricier urban setting or somewhere less expensive and more rural, the answer will also impact your finances. State income and property taxes, which vary widely, can also affect your decision. Whether to live in a house—which can require financial investments for upkeep as it ages—or to downsize to a condominium to free up more cash and have less maintenance activities to worry about is another key point to consider.
- What does retirement mean to you / how will we spend our time?
If you’re both retiring around the same time, do you or your partner plan to work part-time, whether to make extra money or simply to remain active, as many retired professionals increasingly do today? If one of you chooses to retire early, will that partner help the other in his or her professional career? Would you or your partner be happy spending your days pursuing exclusively non-professional interests? What do those interests include? Consider the costs of travel, theatre, family time, etc.
Developing a financial plan for retirement can help answer these questions. It is recommended that each partner prepare to answer these questions separately, as that will make your discussion more productive when you come together to merge your ideas into a unified plan. Do not let yourselves get frustrated if you cannot find common ground right away. Plans of this nature often take months of negotiation before they are set.
- Whose investment style will we follow to meet our mutual goals?
You or your partner may manage your own 401(k)s or IRAs as you move through your careers. This individualized approach does not need to change. However, the two of you should choose a financial advisor that can guide both of your individualized efforts to work together in an overall portfolio that serves your mutual goals. You should also discuss ways to keep your investment funds growing even after you begin drawing on them.
- Will we leave any money to our children and/or to charity?
If you’ve come to this point in your retirement discussion, it is likely that you have agreed upon the points outlined above to your mutual satisfaction. Still, this topic can also produce passionate discussion, depending on your family situation. After you agree upon the best ways to serve your family and legacy, we recommend working with a financial advisor to learn about the many different tools for passing on wealth to heirs or the charitable organization(s) of your choice.
Apt comparisons can be made between athletics and finance — even in terms of retirement strategies. Though retirees should have a trusted financial ‘coach’, the strategies and final decisions during game time is up to the quarterback — you. Brad Johnson, a former football player and current VP of Advisor Development, offered the three insights into how he turned his passion for football into a successful career as one of the foremost finance advisors.
Bend don’t break
Expect some losses but don’t accept them all. During volatile markets, investors oftentimes take flight. In long-term investing, this is the worst thing a retiree can do for themselves and the economy. If you can’t see past the burning forest, make sure you have a great team on your side to help advise you. If certain investments are “broken”, they should be able to steer you towards safer ground.
According to Brad Johnson, staying the course is the best way to ride out the volatility:
There was a saying we had as a defensive unit back in college when I was playing, “bend but don’t break” and I think it relates incredibly well to the mentality most retirees should take with their savings. You see in football it meant you can give up a first down or two on defense, just don’t give up the 60 yard [sic] bomb over your head or the big run down the sideline for a touchdown.
Don’t have all your players in one place
As mentioned in an earlier blog, much of the last 60 years of “tried and true” investing no longer reaps the rewards seen in decades before, however, one thing that does remain is diversification. Retirees should not be afraid of making certain risks but having a diversified portfolio, like diversifying your best players is a great tactic to employ. Using diversified retirement strategies like hybrid fixed annuities, IRAs, Roth IRAs, and the strategies mentioned here for retirement will spread out your best players.
This was drilled into us by our coaches and by making sure everyone was playing their position and role within the defense.
What’s interesting is that this exact same philosophy applies incredibly well to retirement and the need for utilizing tools within your retirement that all play a certain role. Just as you wouldn’t have an entire football team made up of 11 running backs, for most retirees they shouldn’t have an entire retirement nest egg made of high risk/high reward equities.
Have a good defense
As we’ve all heard many times: a good offense is a great defense. This also applies to retirement. The most prized asset in your financial portfolio is a Plan B. In other words, always prepare as much as possible. Your knowledgeable advisor is your best defense against making decisions based on misguided or incorrect intel. They should have the answers to your burning questions because they’ve played the game a lot more than you have! So don’t be afraid to confer with your coach.
With the help of your advisor, there are ways to implement safeguards that can help you grow and keep your money. In the words of Mr. Johnson, these advisors are a crucial way to keep all your “eggs” intact:
Going back to the “bend but don’t break” mindset, this is what sent many retirees looking for a part time job or caused them to delay retirement back in 08-09. Essentially their nest egg “broke” when the market was cut in half.
There are a number of tools available to help[s] create a sustainable base for income through retirement that help shield retirees from this risk – think of them like the offensive linemen on a football team, they don’t get much glory, but no football team could survive without them!
Like Brad Johnson, a financial advisor can help coach a retiree into strategizing the best retirement plan that will help them score a “touchdown” as Johnson puts it. At the end of the day, it is your retirement, your game so to speak; but with a keen knowledge of the playing field and a strong supporting team, a retiree can get to their end zone with a win.
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