- Personal Finance
How to Protect Your Retirement
Protect Your Retirement
You work hard, save each payday, and grow your net worth. You dream of retiring a millionaire.
Then, a calamity destroys your finances. The net worth you built over many years plummets in a matter of weeks, days or even seconds. Don’t let this happen to you.
Biggest Threats to Retirement
Medical Expenses. The biggest threats to your retirement are medical expenses. Medical expenses are the #1 cause of bankruptcy, causing a full 42% of bankruptcies! As medical costs keep rising at rates far exceeding inflation, this threat will only increase.
You can take several actions to keep medical expenses from destroying your retirement. First, make sure you have adequate health insurance. Try to find a job with health insurance benefits. If you find one, select a comprehensive plan. If you can't get health coverage through work, check if you qualify for any health insurance program offered by your state, since premiums are often subsidized. Otherwise, shop for insurance online using a site such as ehealthinsurance to obtain quotes. Disclose any pre-existing conditions if asked since there’s no point buying insurance only to have your insurer refuse to provide coverage due to an inaccuracy in your application.
Second, take affirmative actions to minimize health issues. Schedule preventive care checkups with your doctor to avoid having minor ailments transform themselves into costly problems. Eat healthy food. Watch your weight. Exercise. Minimize stress. Avoid especially risky activities. Not only will these actions minimize your health costs, but you’ll feel and look better, and be happier!
Job Loss. The next biggest threat to your retirement is job loss. Job losses cause 22% of bankruptcies, making them the #2 cause of bankruptcy. While the 8.1% unemployment rate in the US in April 2012 is an improvement from its 10% rate in October 2009, it still represents 12.5 million people. An additional 18% of the population is underemployed. With rapid changes in technology causing the quick rise and fall of different businesses, few people are immune.
There are actions you can take to prevent a job loss from destroying your retirement. First, when you initially decide on your career, select a position and an industry with good growth prospects. Second, volunteer to work on the hot new project at your company, preferably if it relates to your company's core products. You'll be less likely to be eliminated during the next round of cost cutting. Third, invest in yourself. Take courses. Read professional journals. Go to conferences. With the speed of technological change, you need to continuously learn throughout your career. Finally, network. Having a large circle of colleagues will make it easier to land a new job if you need one.
To minimize the damage of a job loss, build up savings while working sufficient to maintain your lifestyle for at least 3 months. That will give you time to find a good job, and keep you from jumping quickly at a bad job because you’re desperate. Once you are laid off, immediately take steps to reduce your spending so you can make that savings last, such as cancelling your cable TV.
Excessive Spending/Poor Use of Credit. The #3 cause of bankruptcy, responsible for 15% of bankruptcies, is excessive spending or poor use of credit. People who succumb to this threat simply spend more than they earn. Commonly, these people buy too many clothes, meals out, etc. on their credit cards. While none of these individual purchases is critical, the net effect of too many purchases over a long time can be disastrous for a retirement nest egg.
There are ways to defuse the excessive spending/poor use of credit hit to your retirement. One is to follow the “pay yourself first” maxim, where you set aside a portion of your paycheck to fund your retirement plan and savings accounts, and then spend only the remaining money. Another way is to set a budget that limits your spending on discretionary items, and then stick to this limit.
Divorce/Separation. Another threat to your retirement is divorce or separation. A divorce causes an immediate spike in spending that may drain your savings, such as the costs to maintain two households rather than one, plus any fees associated with the divorce itself (e.g., attorney fees). It’s not unusual for both ex-spouses to suffer a financial hit, which is why divorce/separation is the #4 cause of bankruptcy, accounting for 8% of bankruptcy cases.
The best way to avoid being hit by divorce/separation is to practice prevention: don’t jump into marriage. Make sure you’ve known your future spouse for long enough to have experienced a variety of situations together so you know what to expect once married. Talk about your financial situation and your financial goals to avoid the most common marital problem: money. If you are contemplating divorce or separation, first see a counselor to determine if you could repair your relationship. If divorce or separation is unavoidable, commit to mediation to work out a mutually acceptable divorce agreement that keeps your financial assets out of the hands of your lawyers.
Unexpected Disaster: Theft; Fire; Weather Events. Another threat to your nest egg is unexpected disaster. This threat includes theft, fire, tornadoes, hurricanes and other natural or man-made disasters. Disasters are the #5 cause of bankruptcy, at 7% of all bankruptcies.
Unexpected disasters can be difficult to plan for since they are, by definition, unexpected. That said, they are among the easiest to mitigate by buying insurance. Buy adequate insurance coverage to protect your property against theft, fire, flood, wind, tornadoes and earthquakes.
Also, take steps to help avoid/mitigate damage in the event of a disaster. If you live in an area threatened by wildfires, use fire-resistant building materials and landscaping. If you live in a region prone to hurricanes, install hurricane-resistant shutters and tie downs. For information about steps to take, consult your insurance agent.
Other Threats to Your Retirement
We have already explored the top five causes of bankruptcy, which together account for 94% of bankruptcies. Each of these threats has the potential to blow a hole in your retirement nest egg. The remaining 6% of bankruptcies are due to: avoiding foreclosure (1.5%); poor financial planning (1.5%); preventing loss of utilities (1%); student loans (1%); and avoiding repossession (1%).
There are, however, other life events with the potential to derail your retirement plans:
College Expenses. During the 2011-2012 school year, national average college costs were $16,000 for a two-year public college, $20,000 for a four-year public college, $42,000 for a four-year private college, and $56,000 for an elite four-year private college. To make matters worse, many students need to attend college for an extra year or two to graduate, piling up costs. Clearly, the college bomb has the potential to cause severe damage to your retirement portfolio.
Luckily, you can control college expenses to prevent them from ruining your retirement. A great way to control college costs is to pick a less expensive school. Attending a four-year public college rather than a four-year private college should cut expenses by more than 50%. Some students save thousands by attending community college for two years before enrolling at a four-year public or private college--which becomes the college that grants their degrees. Fully researching potential careers before matriculating college can help students graduate on time. Of course, studying hard and diligently attending classes also helps students graduate on time. College costs can also be reduced by applying for scholarships and using tax credits and deductions.
“Dream” Wedding/Mid-Life Crisis Sports Car/Boat/Vacation Home. Extremely expensive purchases can hurt your retirement. You may shatter your nest egg if you spend $100,000 on a dream wedding, buy a $90,000 Porsche, $150,000 boat, or $400,000 vacation home.
To avoid shattering your nest egg with one purchase, pay cash rather than use credit. If you only have $25,000 in cash when your daughter announces her engagement, cap your contribution to the wedding at $25,000. If that’s insufficient, let someone else pay the extra costs. Also, think carefully about why you’re making the purchase, and see if there’s a less costly alternative. For example, could you join a boat club that allows you to rent a comparable boat a few times each year? Chances are good that you wouldn’t actually use the boat more than that anyway.
Saving for retirement is a long road. You’ll likely make steady progress along that road for 20 or 30 years. Plan ahead and take proactive steps to prevent financial threats from setting you back.