Here’s How to Shock-Proof Your Retirement Plan (Once You Have One…)

Dad was several years older than Mom, and toward the end of their lives, in poorer health than hers.

I tried asking Mom if they had plans in place to take care of her when dad passed away.

For obvious emotional reasons, she refused to even think about it. Less than two years later, Dad passed away. We had to scramble to make sure Mom was financially secure. Dad’s pension and social security benefits dropped more than 40% once he passed, while expenses dropped by only 20%.

Shocks like this can derail your retirement plan, if you even have one. The following details some of the more likely shocks, and tells you how to keep your plan on track.

It’s not Enough to Have a Retirement Plan, but It’s an Important Start

One of my favorite quotes on planning (often misattributed to Ben Franklin) says, “Failing to plan is planning to fail.“

What better evidence for this than the miserable state of retirement planning among American workers?

According to a TransAmerica Center for Retirement Studies report, only 1 in 5 workers has a written retirement strategy. Worse, nearly half of those who estimated their retirement needs confessed that their answer was a guess.

No surprise then that the estimated median savings for Baby Boomers (born 1946-64) is only $152,000. That’s only 15% of the $1 million workers believe they’ll need to retire. Gen-Xers (born 1965-78) are far behind even that low mark, with a median of $66,000. Millennials (born 1979-2000) have only $23,000 saved for retirement.

The median for all ages, $50,000, instead of increasing, dropped 21% over the past few years from the $63,000 in TransAmerica’s 2016 data.

Bloomberg reported recently that nearly half of Americans 55 or older have zero saved in a 401(k) and individual retirement plans.

According to BankRate, 2 in 5 Americans save nothing or less than 5% of their annual income for retirement. Only 1 American in 6 saves over 15%, which you need if you start at age 25 and want to retire by your mid-60s.

All this helps explain why 69% of workers 60 or older plan to work, or already work, past age 65. That’s if they even plan to retire.

Shocks Can Derail Retirement Plans and Retirement Itself

The Society of Actuaries (SOA) examined how the unexpected can affect retirees and retirement plans. Major factors that could derail your retirement plans include:

• Sequence-of-returns risk: If the markets tumble just as you enter retirement, your risk of outliving your money increases dramatically.
• Becoming a widow/er: This is especially devastating if your spouse’s retirement income came mostly from a pension or annuity that stops upon his or her death. As I shared above, this almost undid my mom’s retirement when Dad passed away.
• Divorce during retirement: If you divorce after retiring, your entire plan is likely out the window. Suddenly you each need a separate housing solution, a separate car (unless you live in an area that’s especially walkable and/or with great public transportation), and spend more on previously shared services (cell phone plans, streaming TV, etc.).
• Dental expenses: Few appreciate how expensive dental care can be in retirement, since Medicare doesn’t cover it very well. Late in life, my mom needed to replace all her teeth with implants. At several thousand bucks a piece, that had a major impact on my parents’ retirement savings.

Contingency Planning – Shock-Proofing Your Retirement Plan

Say you’re far ahead of the pack. You have a written retirement strategy. You even have more set aside than most of your peers. Have you considered that an emergency or medical issues could force you to retire sooner than planned? Or that you might need to deal with a savings shortfall for some other reason?

If you answered yes, you’re one of only 12% who have considered such risks. Broken down between generations, 14% of Millennials, 12% of Gen-Xers, and only 7% of Boomers have done so.

As for non-retirement shocks, the median emergency savings are $5000 for all ages ($2000 for Millennials, $5000 for Gen-Xers, and $10,000 for Boomers). That’s nowhere near the 3-6 months’ spending recommended by most experts. It’s even further from the 6-12 months’ expenses needed if your income is more precarious and/or have more responsibilities.

Shock-Proofing Your Own Retirement Plan

To keep your retirement plans on track, you need to manage the risks mentioned above. Here’s what you can and should do.

• Budget for contingencies: When estimating how much you’ll need in retirement, add a margin on top of whatever you expect to spend. With so much unknown, NASA’s guidance for its projects is to assume a 30% higher budget than you think you’ll need. If that’s good enough for launching spacecraft, it’s probably good enough for planning your golden years.
• Save more: This is the easiest risk mitigation, and will automatically happen if you plan for a margin on your retirement budget. If you have a larger portfolio when you enter retirement, you will have more reserves and more options.
• Break your retirement budget into Needs and Wants: If nothing bad happens, you’ll be able to spend as planned. If an unexpected shock hits, you’ll be better prepared emotionally and practically to cut back, minimizing your “Wants” spending.

The Bottom Line

The first step in shock-proofing your retirement plan is to have a retirement plan in the first place.

Next, add a margin of 30% to what you think you’ll need, and set aside enough to fund that higher amount.

Finally, identify where you might be willing to reduce spending in retirement if the market tanks early in your retirement or you suddenly need to pay a large amount of money for unexpected reasons.

Where are you in your retirement planning process? Have you considered preparing for the unexpected?

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

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