13 December 2018

Money Disasters Can Derail Retirement

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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. 

Click here for the original article.

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