Watch Out for ‘Retirement Derailers’

retirement planning

If you have ever seen a train derailment, even if it was just one in a movie that was created by special effects, you know how destructive it can be. The sponsor of a recent survey that was designed to gauge the retirement readiness of Americans used the term “retirement derailers” to describe the destructive effect that unexpected financial emergencies can have on Americans in the critical pre-retirement years.

These retirement derailers include things like job losses and long-term unemployment or underemployment, divorce, large medical bills, the loss of a home due to foreclosure, underperforming investments, caring for aging parents, college tuition for children, and adult children needing financial support and/or moving back home due to long-term unemployment.

“Situations like these may force individuals and couples in their 50s and 60s to re-examine assumptions they’ve made about retirement and re-adjust their retirement plans on the fly,” says David Lerner Associates Branch Manager Anthony F. Meere. According to the survey, which was recently conducted by Ameriprise Financial who questioned individuals between 50 and 70 years of age who had at least $100,000 in investable assets, most Americans are hit by at least one unexpected retirement derailer at some point in their lives.

“If anything, this survey emphasizes the importance of expecting the unexpected,” says Meere. “If you factor the possibility that you could be hit by some sort of retirement derailer into your planning process, you will be better prepared to withstand it and make adjustments to help keep your retirement plans on track if and when you are hit.”

Three Options for Dealing With Derailment

According to Meere, individuals and couples hit by a retirement derailer during their pre-retirement years — generally defined as between the ages of 50 and 65 — have three main options for getting their retirement plan back on track:

1. Work longer.“This isn’t what most people want to hear, but unfortunately, it’s what they may be facing if they haven’t reached their retirement savings goal by the time they reach their originally planned retirement date,” says Meere.

But this option isn’t necessarily the worst-case scenario, as it’s not uncommon for individuals and couples to grow bored and restless soon after retiring. “Assuming their health allows it, continuing to work can sometimes be a blessing in disguise,” says Meere. “Perhaps you can cut back to part-time hours for a few additional years in order to boost your retirement savings account balance a little higher and help ensure that you don’t run out of money later.”

2. Save more money.The pre-retirement years often represent the peak earning years for many individuals and couples. In addition, their children have often left home and finished college, so these expenses may be lower as well. “In these situations, it may be a little easier to set aside some extra money for retirement to help make up for the derailment,” says Meere.

The federal government has made it easier for pre-retirees to contribute more to their retirement accounts via special “catch-up contributions.” Individuals age 50 and over can contribute an additional $1,000 per year to their IRA (for a total annual contribution of $6,500 in 2013) and an additional $5,500 to their 401(k) (for a total annual contribution of $23,000 in 2013).

3. Spend less money.“Here, we’re just talking about good old-fashioned belt-tightening,” says Meere. “Take a close look at your monthly budget for areas where you can cut back your expenses — whether this is going out to eat less, cutting back on your cable TV or cell phone bill or not going on vacation — and put this money directly into your retirement account.”

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC


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