In a perfect world, you would be able to save a set percentage of each paycheck for your entire career, leaving you with a healthy investment balance at retirement. Unfortunately, life is not linear, leaving you to deal with roadblocks and detours, which can derail the best-laid plans to save for future needs.
While obstacles create challenges, delays can prevent you from reaching your long-term financial goals. Recognizing common life events, which force detours, and establishing contingency arrangements is one way to address hurdles that make it more difficult to save as planned.
The following life events can cause financial disruptions to retirement savings.
The loss of your primary source of income can not only eliminate the ability to save but can raise debt levels, which take years to unwind. Job termination can distress retirement savings because you no longer have enough money for basic needs, let alone extra for investments. You lose the ability to contribute to the company 401k plan, lose matching contributions, and may be tempted to withdraw funds for immediate needs.
Short gaps in contributions will not drastically affect investment balances, especially if you can resume contributions at the same or higher level in your next position. Periods of extended unemployed can mean thousands of dollars less in investment accounts at retirement.
Building an emergency fund with four to six months’ worth of expenses is one way to mitigate the financial impact of a job loss. Keeping skills fresh can also enable you to find new employment quickly.
To avoid the financial detour, cut living costs immediately. Use emergency funds to bridge the income gap rather than adding debt, when possible. You can make up shortfalls due to job losses, through catch-up contributions when you reach 50.
Whether you become hurt on the job, a car accident, or become ill, medical emergencies can add unexpected costs to the budget while reducing income due to work absences. Accidents can devastate family finances. Co-pays and deductibles can wipe out savings and insurance companies may deny claims.
Buying insurance can help mitigate the costs associated with medical emergencies. Beyond health insurance, consider short and long-term disability policies, which provide income to replace your paycheck, if you miss work due to an accident or injury. An emergency fund can also bridge the income gap. Avoid the temptation to withdraw money from retirement investments, which could result in losing as much as 40% of the withdrawal due to taxes and penalties, along with the lost account growth.
‘Until death do us part’ is not always the case with marriage. A young couple marrying for the first time has a divorce risk of 40%. Divorce is not good for finances because you have the same income, now spread across two households. Fighting over assets can also drive up court and attorney costs, further depleting financial reserves. The effects of alimony and child support can impact your income for decades. In addition to higher costs, you might face dividing retirement accounts in the settlement, which can leave the account underfunded.
Prenuptial agreements can mitigate losses in a divorce. When both parties, fund independent retirement accounts, you can reduce the need to split accounts in the event of a divorce, keeping current investments intact.
Going Back to School
According to a 2011 Harvard study titled “Pathways to Prosperity,” only 56% of students enrolled in a bachelor’s degree program finish within six years. The result is many working adults decide to complete schooling or get an advanced degree later in their career. Going back to school offers career advancement and income growth, often worth the financial sacrifice.
To mitigate the financial strain, seek free assistance through grants, scholarships or fellowships. Your employer might offer tuition reimbursement, and you can take advantage of tax credits in many cases to lower the cost of attendance. Take out student loans judiciously, because payments will impact the family budget during the decade or more of repayment.
It is often possible to attend part-time while maintaining your current job, which will lessen the financial impact of additional schooling.
The U.S. Center for Disease Control and Prevention estimates that 3,952,841 babies are born annually in the US, which breaks down to 10,829 babies born every day. According to the United States Department of Agriculture, the cost of raising a child from birth to the age of 17 will set you back $233,610 on average, making children a significant financial commitment.
Planning for major expenses such as child care in their early years and college down the road can mitigate the impact on retirement investments. Boosting income or reducing expenses is another way to address the additional costs associated with rearing children.
Caring for An Older Parent
Twenty-five percent of Americans help parents handle their affairs or take care of basic needs. Roughly 58% of adult children have helped parents with housework, home repairs, or errands, and nearly 28% have assisted parents financially in the last 12 months. Your parents have cared for, raised, and provided for you financially. Now, adult children often find themselves assisting them, which can impact family finances.
Whether loved ones’ face health issues or financial shortfalls, it can become time-consuming and expensive to care for their ongoing needs. To mitigate the financial impact, seek out programs designed to help seniors live independently. Insurance such as long-term care can also help lower some of the costs associated with aging if purchased in their younger years.
Buying A House
Home ownership can be an investment that appreciates over time. It can also become a burden due to high property taxes and ongoing home repairs, which can take a toll on your finances. As a renter, you are responsible for the rent. Whatever breaks, the property owner fixes. Homeowners take on all the costs associated with the home.
To prevent the house from becoming a financial burden, buy a home within a price range that leaves you with a comfortable monthly payment. Then set aside money each month to cover needed repairs and upgrades when they arise.
It is impossible to predict investment performance. Yet, market crashes can decimate an account due to unforeseen economic fluctuations. Relying on stock market investments enable you to achieve account growth, which outpaces inflation. To mitigate the risk of market downturns, invest in a diversified portfolio, which becomes more conservative as you near retirement.
Life events require you to dedicate money to retirement contributions, ahead of immediate financial pressures. However, when you make retirement investing a priority, you will find a much better future lies ahead.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.