Money disasters can derail retirement

[November 28, 2018]   By Gail MarksJarvis

CHICAGO (Reuters) - Karyn Golden’s income was approaching $200,000 as she lived a carefree single existence at the peak of her career in Chicago, 20 years ago. She brokered real estate deals, served on boards and lunched with political leaders. She never imagined she would be where she is now – 70 and down to her last $200 in savings.

But like many people, her life changed unexpectedly. First an employer went bankrupt; then the financial crisis in 2008 shut off most jobs in real estate and left her struggling to find work outside her field, and then cancer. She used up nearly all her savings paying for doctors and living expenses while sick and unable to work.

“I should have saved more, but no one told me,” said Golden. “I didn’t know what I was supposed to do.”

Golden’s regrets are common. According to a study by the Rand Center for the Study of Aging, 67 percent of Americans ages 60 to 79 wish they would have saved more for retirement earlier in life. But they often ran into money disasters that got in the way.

Contrary to popular retirement saving strategies that are based on the assumption that procrastination is the root of the problem, the Rand researchers think there should be more focus on the probability of money disasters, which are much more common than most people assume. That scare would get people to focus on saving more during good times.

Instead, the approach that has become popular in recent years is simply to nudge people to save small amounts on a regular basis through a process known as automatic enrollment. It is a no-brainer approach that does not ask people to think about life’s setbacks or what they should be saving early in case they lose their job later.

A problem with the nudge approach is that it usually means taking a constant percentage of a person’s pay out of each paycheck – often 3 percent. That is going to be far too little if down the road a person loses their job and cannot save anything for few years.

A better approach, according to the Rand researchers, is to get people to expect life’s upsets and save more when they are able.

Just looking at the fragility of jobs can be eye-opening. In a single year, half of working adults encounter a 25 percent spike or dip in their income that lasts at least a month, according to the Urban Institute. For low-income people, that increases to six months.

A retired couple sits on a bench in Enghien-les-Bains, north of Paris, August 26, 2013. REUTERS/Christian Hartmann

A spike might make people over-confident that the good times will continue and provide plenty of money to save, while a downturn could strangle household budgets and shutter additional saving.

For older adults, shocking job troubles could be long-lasting and leave people vulnerable in the years they might have planned to escalate savings before retirement.

Between 2008 and 2012, 47 percent of workers 50 to 61 who lost their jobs were out of work for at least 12 months, according to research by the Urban Institute. As they found new jobs, they took a 23 percent cut in pay on average – leaving them short of money to save.

“People need to be aware that unemployment could set them back for years,” said Michael Hurd, director of the Rand Center for the Study of Aging.

Overall, negative financial situations impacted 56 percent of the sample surveyed from Rand’s 6,000-person database, with the most frequent and damaging being unemployment, a health issue that interfered with work or divorce.

Procrastination did not make the list.

SCARED STRAIGHT

The recession already motivated some young adults to prepare for the shocks that can arise without warning.

While receiving no specific education on life’s uncertainties, Bryan Rojas, a 24-year-old waiter at The Dearborn Tavern in Chicago, said he learned the lessons inadvertently by watching his father struggle without saving.

Despite limited pay, Rojas is contributing 5 percent of his waiter’s paycheck to a Roth IRA available at his workplace through Illinois’ Secure Choice Program, which lets employees at small companies save on the job.

“Everyone worries about money,” said Rojas. “You have to buy shoes and cars and I don’t want to be 60 years old having bills and a mess.”

(Editing by Beth Pinsker)

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