What would you do if you discovered a leak in your roof? Repair it as soon as possible or wait until it led to more costly, long-term damage?
For most people, the answer is easy: repair it now. But what if you didn’t know about the leak until it was too late? The same thing can happen with your finances. You have a general idea of how much money is entering and exiting your household on a monthly basis, so why do you need a budget? You know you need to bolster emergency savings and put a comprehensive plan in place for retirement, but you’ve got more pressing priorities today. The problem is, the longer small gaps or holes in your financial house are allowed to fester, the more widespread the potential damage, making it harder to accomplish your long-term goals like saving for retirement.
Below are six ways you may be sabotaging your own retirement savings efforts without even knowing it, and steps you can take now to close the gaps for a more secure financial future.
1. You don’t have a budget
Budgets aren’t just for young people starting out. Everyone needs a budget—at all stages of life. A budget tells you where your money goes—what’s coming in and what’s going out. It helps you determine if you’re living within your means or spending money that you should be saving for your future.
Fortunately, today’s technology makes developing a budget easier than ever. Numerous mobile apps and online tools enable you to integrate your bank, credit card and other financial accounts with your budget, allowing you to see what’s coming in and what’s going out in real time. Not only are you able to track what you’re spending, but you’re also better equipped to make decisions about where to cut unnecessary spending or save more for both short and long-term goals, such as emergency and retirement savings.
2. You aren’t automating savings and debt payments
According to the 29th Annual Retirement Confidence Survey (RCS), 70% of American workers say debt is having a negative impact on their ability to save for retirement. Furthermore, 55% of workers say they are unable to save for retirement and save for other financial goals at the same time. Survey respondents said debt negatively impacts their ability to:
- Save for emergencies
- Save for retirement
- Pay bills
- Participate in employer savings plans or other employee benefits
While establishing and sticking to a budget is an important step, if you wait until the end of the month to invest what’s left over or pay down debt, most likely there will be nothing left. Automating savings and debt payments is one of the most effective ways to remain on track toward your goals.
If you work, make sure you are participating in all benefits your company offers, especially any employer-sponsored retirement plans, which make it easy to save through automatic payroll deductions and possible employer matches. Many employers also offer employees an opportunity to use payroll deduction to direct money to outside savings accounts or to chip away at debt. You can also set up automatic payments from most bank checking accounts. This “set it and forget it” method of automating payments can also save you money by helping to avoid penalties and fees due to late or missed payments.
Once debt is paid down, you can redirect automated payments to further increase your savings. If you’ve maxed out on your 401(k) or 403(b) contributions, consider opening a Roth IRA if eligible.
3. You are supporting others at your own expense
About two in five Americans have provided financial support to a family member during the past year, according to the Family Obligations Across Generations survey. While it’s natural to want to help loved ones, it can be a tough balancing act, especially if doing so may jeopardize your own retirement savings.
Even if you’re not providing financial support, caring for loved ones can have an adverse impact on your finances. In the RCS survey, 3 in 10 workers and retirees say that they have provided unpaid caregiving for a relative or friend. Of workers providing care, approximately 1 in 4 report that caregiving has prevented them from saving (26%), led to an increase in debt (23%) and reduced their contributions to a workplace retirement plan (22%). Similarly, the AARP Public Policy Institute reports that 22% of workers ages 45 to 64 report being family caregivers: the largest of any age group in the labor force. What’s more, one in five retirees left the workforce earlier than planned due to the need to care for an ill spouse or other family member.
According to AARP, family caregivers (age 50 and older) who leave the workforce to care for a parent lose, on average, nearly $304,000 in wages and benefits over their lifetime. These estimates range from $283,716 for men to $324,044 for women. Evidence suggests that assuming the role of caregiver for aging parents in midlife may substantially increase women’s risk of living in poverty in old age.
Parents can also set themselves up for a crisis in retirement by supporting adult children financially. According to a CreditCards.com and BankRate survey, 74% of parents help pay for their adult children’s living expenses, with cellphone bills being the most common expense parents help pay, followed by transportation-related costs, rent and utilities. In addition, 52% of parents said they helped their children pay down their student loan debt. Respondents aged 55 and over were significantly more likely than younger parents to help their adult children with debt payments.
There’s no question that balancing the competing priorities and tradeoffs of preparing for and financially managing your own retirement while also helping family members is a tough act. It’s also one that, at times, requires tough love and honest conversations. Work with your adult children to develop a budget and set a timeline for drawing down your financial help. Keep in mind, your adult children still have time to pay off college loans and save for retirement, but you are running out of time to save for retirement.
4. You’re relying on working in retirement
PwC’s 8th annual Employee Financial Wellness Survey revealed that 82% of workers believe they will work full-time (32%) or part-time (50%) in retirement. In line with those results, the RCS study indicates that 74% of workers expect paid work to be at least a minor source of income in retirement. However, in reality, 4 in 10 retirees surveyed retired earlier than they expected, most often due to a health problem, disability or changes within their organization.
While we’d like to think that when we choose to retire is entirely up to us, often, it is not. Circumstances outside of your control can lead to job loss or early retirement. That’s among many reasons why risk management is so critical for addressing the “what-ifs” in life. Begin with developing a plan for how you will generate the income you need if you retire earlier than expected. Do you have money saved through one or more qualified retirement plans, such as a 401(k), 403(b) or IRA? Are you vested in a current or former employer’s pension plan? What percentage of your working income will Social Security replace? Make sure you know what insurance policies you have in force, including life, long-term care and disability insurance.
5. You’re not accounting for rising healthcare costs
Healthcare costs represent one of the most significant expenses you may encounter in retirement. Yet, according to the RCS study, fewer than a third of respondents had actually tried to calculate how much they may need for medical expenses.
While Medicare, which kicks in at age 65, covers a portion of your expenses, the rest is up to you. According to the National Bureau of Economic Research, individuals over age 70 will incur $122,000 in medical expenses, on average, over the remainder of their lives. However, the same study found that some people over 70 may face substantially higher costs.
- 5% of households will experience out-of-pocket medical bills of more than $300,000.
- 1% will see their out-of-pocket medical expenses total more than $600,000.
Healthcare costs are a critical component of retirement planning. However, it’s difficult for most people to determine on their own, how much they may need to set aside for out-of-pocket expenses, which may include long-term services such as home health aides, assisted living or nursing home care. That’s one of many reasons why it’s important to work with a financial advisor. An experienced advisor will have access to the sophisticated software and tools and can perform complex scenario-based calculations to determine how your lifestyle needs may be met under different circumstances. This can help you to plan for healthcare and other important expenses in retirement.
6. You are not seeking professional advice
Speaking of financial advice, a surprising number of Americans are flying solo. Even experienced and highly confident investors can benefit from professional advice from an unbiased third-party. No matter how competent you are at managing your own finances, it’s nearly impossible to do so in a highly objective manner, devoid of emotion. A trusted advisor can also help you approach your finances proactively rather than reactively.
Emotion is the arch enemy of sound financial decision-making. It can cause you to second-guess your strategy; fall prey to a herd mentality (buying and selling investments at the absolute wrong times); under or overspending in retirement, and many other behaviors that create, rather than eliminate, financial stress.
Eliminating financial stress is only one of the many benefits of obtaining professional advice and guidance. The right financial advisor will have access to a full team of resources required to help solve even your most complex needs. But who you work with matters.
The financial advisor you choose to guide your financial future must place your best interests at the forefront of the relationship, working in a fiduciary capacity. A fiduciary advisor is required by law to place your best interests first, serving as your advocate in developing a comprehensive strategy based on your personal needs and goals. Whether you’re already retired or preparing for a retirement that may seem a long way off, you and your advisor can put a plan in place to help close any gaps in your current strategy while paving the way to the future you desire.
To learn more about strategies to pursue the long-term goals you have established for yourself and your family, download our free guide, Living In Retirement.
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