Navigating the unexpected begins with knowing what to expect
Saving for a comfortable retirement is a career-long commitment. It takes planning, patience, perseverance and a whole lot of good old-fashioned discipline to reach this ultimate financial goal.
Some might say it also takes a little luck. Life, after all, is anything but predictable.
On the other hand, being aware of and prepared for the common scenarios that can pull your retirement savings plans off track can take some luck out of the equation. Because if 2020 taught us anything, it’s to expect the unexpected in life.
So let’s start by examining a few of the most common “what ifs” that could derail even the best laid retirement plans.
WHAT IF I GET SICK OR DISABLED AND CAN’T WORK?
This is one we hate to think about, but it’s a contingency everyone needs to plan for. If you get sick, injured or incapacitated for an extended amount of time, the costs can add up fast. Medical bills. Out of pocket costs. Lost wages. Those in the dental industry are especially susceptible to disability because the most common injuries (hands, arms, shoulders, eye) are what dentists rely on the most.
The logical way to protect against this scenario is to spend more on personal disability insurance, right? “Not necessarily,” says Toni Lee, CPA and partner at Cain Watters & Associates.
Toni recommends putting those extra dollars into your emergency fund now, which can offset the higher disability insurance premiums later.
“Having an emergency fund of at least six months will help cover expenses that disability insurance does not,” says Toni. “As the cost of personal disability premiums go up with age, you’re able to keep your coverage at a financially manageable level because your emergency funds are a viable back up option, if needed.”
WHAT IF I GET DIVORCED?
No one goes into a marriage planning for a divorce. But being aware of the impact a divorce can have on reaching your financial goals is definitely worth understanding.
Marriage is a contract, and when that contract is voided, the assets get divided while expenses can almost double. Instead of one house payment, there are two. Same with all the bills that go along with it like electric, water, internet, gas, etc.
Your retirement nest egg will most likely be split in half as well. Toni suggests meeting with your financial advisor well before the divorce is final to start resetting goals and expectations.
“The sooner both parties get that reality check on how divorce will impact their long-term goals, the sooner they can either try to make the marriage work or start planning their individual financial strategies moving forward.”
As a rule of thumb, Toni says divorcees should plan on working another 5-7 years to make up for the division of assets.
WHAT IF I HAVE TO CARE FOR AGING PARENTS?
We’ve discussed before how continuing financial support of your adult children can be a threat to your retirement, but another difficult topic is caring financially for aging parents.
This is a tough one to plan for, but aging is a part of life, and through open communication it is possible to plan ahead. For both parties sake, aging parents should make a plan now and share it with the family in writing to ensure they communicate their desires in advance. Knowing both their wishes and financial situation ahead of time will help everyone plan to see it through.
When the time comes, entering into a retirement home might seem like an almost unsustainable expense. So much so that many often feel compelled to help offset the costs by dipping into their own savings.
Before reaching for your own long-term savings, consider this: The high cost of senior care is typically offset by a reduction in previous expenses. (i.e. house, car, groceries etc.)
“Much of those costs are already in the budget,” says Toni. “So going into a senior living home is mostly a re-allocation of monies that were already being spent elsewhere.”
Only when the parents’ retirement accounts are emptied should the adult children step in to make the difference Medicaid doesn’t cover, if necessary.
WHAT IF I DON’T HAVE ENOUGH TO PAY FOR MY KID’S COLLEGE?
Let’s face it. College isn’t cheap. Even with a concerted effort to fund a 529 each year of a kid’s life, many parents find they still don’t have enough to foot the bill for four (or five or six!) years of college.
Whether the 529 Plan is just a semester or two shy or the college fund is still at zero, the last thing you want to do is take money out of your own retirement to pay for their college. This includes lowering the contribution percentage to your retirement funds so there’s more cash on hand.
Student loans are not “bad debt” like credit cards. They are an investment in your kid’s future, as well as your own. Government-backed student loans carry a low interest rate and payments are not due until after they’re out of college.
“One added benefit I’ve heard many of my clients talk about is that a student loan can be a powerful motivator for a student to hold up their end of the bargain,” says Toni. “You can always help them pay it down later, and it’s a great way to help your kid build credit.”
WHAT IF I’VE BEEN IGNORING IT?
Let’s say you’ve been doing a fantastic job executing your long-term plan:
- You’ve set a clear goal for how much retirement savings you’ll need
- You’re consistently hitting your monthly retirement savings goals
- You’ve diversified your investment mix into tax-advantageous vehicles that will help your money grow. (Learn more about the different tax environments in our Accumulating Wealth Podcast, season 10 episode 3).
You’re checking off all the right boxes, but if you’re not periodically reviewing your portfolio’s progress over time, you could be missing out on a huge opportunity to maximize your savings.
Most retirement plans established by professional advisors are based on a periodic “re-tuning” of your investment mix. As your earning capacity changes and the time horizon to retirement shortens, your allocations should shift accordingly.
The advisors at Cain Watters and Associates recommend reevaluating your portfolio once a year to make sure it’s optimized to meet your goals.
“In the end, true wealth is built on the balance sheet, not the income statement,” Toni said. “It’s not how much you bring in, but how much you save that provides the freedom to enjoy life the way you want to enjoy it.”
By saving early, making short- and long-term savings goals, and being prepared to meet the challenges that life will inevitably throw your way, you’ll be in a better position to help keep your savings on track and meet your retirement goals.
Need more advice dealing with a “what if” on this list, or have a different scenario to consider? CWA is here to help. Talk to a CWA Advisor to start planning a strategy that will keep you on track to your financial and retirement goals.
