Americans are doing a pitifully poor job of saving for retirement. A recent GOBankingRates survey found that about one-third of people have nothing tucked away for their golden years. That should make them worried — and it should also give their children pause.
If Mom and Dad can't afford the basics, chances are good the kids will be asked to help shoulder the burden. Nobody wants that — not the overburdened kids, and not their parents. So, if retirement is on the horizon for you, it's time to shift tactics.
Here are 10 red flags you need to pay attention to now.
1. You Don’t Have a True Investment Plan
If you are relying on growth in your portfolio to reach retirement goals, rethink your financial plan, said Kirk Chisholm, a financial advisor and principal at IAG Wealth Management in Lexington, Mass. Individual investors are notoriously bad at making investment decisions.
The financial services market research company Dalbar studied investor performance from 1984 to 2014. During that 30-year period, investors underperformed the S&P 500 by 7.42 percent annually, earning an annual return of just 3.69 percent, Chisholm said.
"Investors may blame the market, their financial advisor or just bad luck, but the reality is that most investors don't have a plan," he said. Too many investors gamble with investments by looking for a quick big-return trade, while others "buy and hope" with investments, he said.
To be successful, assess your own investor psychology and find an investment strategy that works for you. "This is where having an investment plan is important," Chisholm said.
2. You Own Too Much of an Employer’s Stock
Too much of any single investment can be either a recipe for building wealth, or a ticket to financial disaster. On the one hand, Apple employees who are long-term holders of their employer's stock are probably pretty happy and may be on their way to being set for retirement.
But not everyone who loads up on company stock is so fortunate. Enron employees who were big holders of their employer's stock saw their retirement plans wiped out when the company collapsed and the stock became worthless.
Don't make the same mistake. When you think about the soaring highs and crashing lows that can come with a single investment, you should understand why you need to diversify your investment portfolio.
3. Your Retirement Savings Are ‘Average’
The 2017 GOBankingRates Retirement Savings survey found that 55 percent of Americans have less than $10,000 saved for retirement. And about one-third — 34 percent — have nothing saved.
Too many people think they will start planning for retirement "next year," said Atlanta-based financial advisor Russ Thornton, founder of Wealthcare for Women. Eventually, that notion becomes an annual theme. "They're not willing to save for the future at the cost of delayed gratification," he said.
To make matters worse, many people who are behind on retirement savings eventually try to make up for lost time by taking additional risks. That can do more harm than good, jeopardizing any savings they have accumulated, Thornton said.
The best way to avoid this fate is to start planning for retirement today. Even if you can only save a few dollars per pay period, don't discount the power of compound interest over time.
"The way to get the most out of compound interest is to start saving as soon as possible," Thornton said.
4. You’re Funding an Adult Child’s Lifestyle
Barbara A. Friedberg, a former portfolio manager and co-founder of Robo-Advisor Pros, said the choice to fund an adult child's lifestyle is a path to retirement peril for the parent.
"If you don't contribute enough for your own retirement, you run the risk of outliving your money — or worse, putting your children in a position to have to fund your retirement," she said.
When your children reach adulthood, you need to cut the cord and attend to funding your own future. "You have limited years remaining before retirement to grow your retirement nest egg, and your children have many decades to get their lives in order and build their own financial security," she said.
Sterling Raskie, a financial advisor and vice president of client engagement at Blankenship Financial Planning in New Berlin, Ill., added that one way to avoid having to fund your children's lifestyle is to encourage your kids to become more self-supportive. If they live at home, charge them rent and utilities.
"Give them a timeline of when they need to be out of the house or completely independent of Mom and Dad," Raskie said. "Require that they find a job — a serious job, not a one-day-a-week job."
Related: Why You Must Prioritize Your Retirement Over Your Kids' College
5. You Have Not Planned for Medical Expenses in Retirement
Too often when saving for retirement, workers neglect to plan for the cost of their healthcare needs. Neglecting this expense can derail the best-laid retirement plans.
Fidelity's 2016 Retiree Health Care Cost Estimate projected that the cost of healthcare for a 65-year-old couple retiring in 2016 is expected to total $260,000 over the course of their retirement. This is a 6 percent increase over 2015, and the highest estimate since the survey began in 2002.
Jody Dietel, chief compliance officer of consumer-directed benefits provider WageWorks, said more people should be aware of the need to save for healthcare costs in retirement. "It's important to understand that there's a place for both a 401k and an HSA," she said, referring to a health savings account in the latter example.
6. You Have Excessive Debt
Surprisingly, the majority of Americans say they are not in debt, according to a recent GOBankingRates survey. And yet that same survey found that among those who do owe some money, debt is the No. 1 source of financial stress.
Entering retirement with excessive debt can cause problems down the road. Whether it is credit card debt or even a mortgage, you need to find ways to reduce debt when moving into retirement.
Everyone's situation is different, and you might be able to handle a mortgage if you have a sufficient nest egg. But while a mortgage payment might seem affordable early on in retirement — especially if you are still working a bit — you need to assess whether the payment will be sustainable throughout your retirement years.
7. You Don’t Have a Spending Plan
Failing to plan is planning to fail when it comes to retirement spending. You need to put together a retirement budget, and ideally should do it before you quit working.
Take a hard look at your lifestyle and what it will take to support it. This analysis is critical, and can drive any number of key retirement decisions, including:
- Where you will live
- When you will be able to quit working
- When you should claim Social Security benefits
Once you have enough money saved, figure out how you want to spend that money, said Jim Poolman, executive director of the Indexed Annuity Leadership Council. "It is essential to realize that the money you have now will no longer be replaced by that regular monthly paycheck, so budgeting is crucial," he said.
8. You’re Withdrawing Too Much Early in Retirement
Withdrawals during retirement are not always equal. Spending on travel and "toys" like a boat or a motor home might be higher in the first few years of retirement. These expenditures tend to be smaller as you age and slow down. But that doesn't necessarily mean retirement will become less expensive later.
Later in retirement, high medical costs can replace the spending you did earlier on. Couple medical costs with the fact that you might live longer than expected, and you can see how it can crimp your nest egg's ability to sustain you throughout retirement. So don't withdraw too much early in retirement in the hope that expenses will decrease later in life.
In retirement, you will not have a job's salary and benefits to help cover expenses such as healthcare and travel costs, Poolman said. You might have to spend more money on long-term care for yourself or your parents.
"On top of these necessary investments, retirees often like to cross things off their bucket lists and engage in leisurely activities such as traveling — all of which cost money," Poolman said.
9. You’re Depending on Working to Fund Your Retirement
A 2014 survey by Transamerica found that 65 percent of workers planned to work after age 65. Other surveys have reported similar results. While the desire for intellectual stimulation is part of this, undoubtedly the need for additional income in retirement is a key driver.
However, the news is not good for those planning to work late into life. A 2017 survey by the Employee Benefit Research Institute found that 48 percent of older workers left the workplace earlier than planned. Top reasons included:
- Health problems or disability (41 percent)
- Changes at their company (26 percent)
- Ability to afford retirement earlier than expected (24 percent)
The fact that 67 percent of those people left the workforce for reasons beyond their control is one more good reason to save as much as you can during working years.
10. You Don’t Have a Plan for Your Long-Term Care Needs
There is a good chance you'll need long-term care at some point during your retirement. The cost of long-term care varies quite a bit across the country. Median annual nursing home costs for a semi-private room in Alaska are around $292,000, while they are $54,020 in Texas, according to a 2016 Genworth survey.
Even at the low end of the scale, this cost can be financially devastating and cause you to run through retirement savings quickly.
Alternatives like long-term care insurance can help, but the premiums are often steep. If you have enough retirement savings, you might be able to self-insure. However you do it, planning for your potential long-term care needs should be a part of your retirement planning.
The best gift parents can give their adult children is to be self-sufficient in retirement. Addressing all of these issues and others can go a long way toward that end.