A job loss, financial emergency, divorce or death of a spouse can derail plans to save for retirement. Whatever the reason, and whatever your retirement age, it’s important to get back on track, particularly if you long for early retirement. Don’t be one of the 40 percent of people who aren’t saving for retirement.
Here are some warning signs that you’re at risk of retiring with no money:
1. You Need More Cash in Your Portfolio
Cash is helpful to have on hand as a cushion for the unexpected, said personal finance writer Julie Rains. “If you have cash available for emergencies, you can avoid tapping a home equity line of credit or putting charges on a credit card,” she said. “You may also be able to avoid selling investments when the market is down just to pay for a new roof or furnace.”
Rains recommends setting aside money in a savings account that you pledge not to touch for day-to-day needs or wants.
Find Out: 42 Easy Ways to Save for Retirement
2. Your Portfolio Has Too Much Employer Stock
Rains acknowledges that in some cases, employer stock can make workers wealthy and give them the means to retire. But she cautioned that it can be risky to have too much of your portfolio dedicated to one security. “Consider diversifying your holdings prior to retirement, so a severe decline in your employer’s stock price won’t wreck your retirement plans,” she said.
Not only does too much employer stock expose you to market risk, but a downturn in the company can result in a job loss. So, you could lose your nest egg and job at the same time. Too much company stock is the ultimate example of putting too many eggs in one basket.
3. Your Credit Card Balances Are High
“Growing balances on your credit cards are surefire signs you are going to retire broke,” said Benjamin Brandt, a certified financial planner with Capital City Wealth Management in Bismarck, N.D.
“Many people who aren’t consistent with their family budget turn to credit cards to pick up the slack,” he said. “Sure, you can always pick up an extra shift or work overtime to pay off your debts. But the bigger picture is that your lack of a budget is robbing your retirement of new contributions.”
Brandt urged investors to ditch the credit cards, get on a budget and contribute large amounts of cash to retirement accounts.
4. Your Net Worth Is Tied Up in Your House
Paying off your mortgage and retiring debt-free is a huge accomplishment, said Taylor Schulte, a certified financial planner and founder of the San Diego-based fee-only financial planning firm, Define Financial. He added, however, that it can be tricky to put together a retirement income strategy if most of your assets are locked up in your home.
“If the equity in your house represents more than 50 percent of your net worth, it could be a sign that you’re going to retire broke,” he said.
A home is a great place to raise a family and live your life, but it is an illiquid asset. And as the Great Recession showed, houses can be a risky financial asset. It’s a bad idea to tie up the majority of your net worth in your home.
5. You Forget About Inflation
“Most people tend to take less risk as they close in on retirement,” said Clint Haynes, a chartered mutual fund counselor and founder of NextGen Wealth in Lee’s Summit, Mo. “That isn’t a bad thing, but it does present some risks. You still have to remember that inflation can have a major impact.”
As you plan for retirement, research historical inflation rates and account for it when calculating your returns.
“Remember, inflation has averaged around 3 to 4 percent over the long term,” he said. “So if you’re not earning at least that much, you’re actually losing ground.”
Although it’s fine to “take some chips off the table the closer you get to retirement,” you need to understand the effect inflation can have on your purchasing power, Haynes said. Make sure your investments provide you with the potential to earn returns in excess of inflation.
6. You’re Still Waiting for the Right Time to Invest
A lot of people are behind on retirement savings because of other pressing financial matters, said Vic Patel, the New York-based founder of Forex Training Group. He offered a warning to those in their 30s and 40s.
“You are very likely to retire broke unless you make a serious effort to start putting some money away every month into a retirement account and let those funds compound over time,” said Patel.
7. You Load Up on Bond Funds
“People purchase bond funds when they are looking for a safe way to get returns,” said Charles C. Scott, president of Pelleton Capital Management in Scottsdale, Ariz. “However, bond funds can be somewhat risky when interest rates rise, and the bond funds lose some of their principal value.”
“Picture a teeter-totter: On one end sits interest rates, and on the other end is principal value,” he said. “Since 1982, interest rates have gone down, so principal values have gone up. Interest rates are at or near historical lows, so when that reverses direction, values will go down.”
The duration of a bond fund will have a big impact on how much rising interest rates will damage returns.
“A fund with a duration of six and a half years will lose principal value of approximately 6.5 percent for every 1 percent increase in long-term interest rates,” Scott said. “It’s just bond math. Know what will happen when interest rates go up and take appropriate steps.”
8. You Cash Out Your 401k Plan When You Change Jobs
In today’s world, many people have several jobs during a career. When you change jobs or leave an employer, it’s important to manage your old retirement plan account. Your options might include:
- Rolling your balance into an IRA account
- Rolling your balance into a new employer’s 401k plan
- Leaving your balance in your former employer’s plan
- Cashing out
Cashing out triggers a tax bill — and if you are younger than 59.5, you’ll pay an additional 10 percent penalty. Moreover, taking distributions can be a big retirement planning mistake because they drain your nest egg. In fact, if you take too many distributions, you could be left with no retirement savings.
Barri Segal contributed to the reporting for this article.