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Retirement Planning > Retirement Investing

'Derailers' throw retirement plans off track

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Sometimes the best financial advice comes from unlikely places. Consider the famous directive uttered on “Monty Python’s Flying Circus”: Expect the unexpected.

Those three simple words are the bottom line message from “Retirement Derailers,” a survey from Ameriprise Financial. “Derailers” are occurrences like the recession, the need to help a child or grandchild or the loss of a job that can throw a long-term financial plan off track.

“These events are likely to happen,” said Suzanna de Baca, vice president of wealth strategies for Ameriprise. “The most important thing an advisor should take away is to tell their clients that the unexpected will happen.”

Unfortunately, she added, the chance of being hit by at least one of these risks is extremely high. 

And expensive. Ameriprise found that the average respondent to its survey of 1,000 Americans between the ages of 50 and 70 who have at least $100,000 in investable assets, had experienced four derailers and lost an average of $117,000.

“The actual cost of derailers is surprising. The fact that $117,000 is such a large number is significant,” de Baca said.

Although respondents recognized their retirement planning had gotten off track (35% deemed it extremely serious and 83% somewhat serious), most are still optimistic.

Almost two-thirds (64%) said their investment road has been “smooth.” Conversely, 42% say their retirement savings lag behind the projection they made 10 years ago.

“A few things surprised me (about the Ameriprise report). One thing is how well people think they are doing and that it isn’t backed up by numbers,” said Joel Redmond, a CFP ambassador and senior financial planner for Key Bank in Syracuse, N.Y.

Recognizing that fact might not be so easy for many investors.

“The disconnect between perception and reality might be as much emotional as it is intellectual,” according to Jean Setzfand, retirement specialist at AARP.

“In some ways, people embrace their role of being in charge of their financial planning,” said Setzfand, who leads AARP’s educational and outreach programs. “But they have yet to emotionally embrace the fact they might not have enough live on.”

In that gap between the truth and belief about the state of a retirement company seems to lie an opportunity for wealth advisors.

There’s no shortage of stories about how many Americans are unprepared for retirement. The best way to keep clients’ retirement accounts on track, experts say, is a matter that takes a multi-pronged approach. De Baca said investors need to keep in mind a basic truth that underlies all financial planning:

“You can get derailed by events or choices in any market environment,” she said.

Choices, including spending on a home, entertainment and other items, can be controlled.

Health costs, the loss of a job and other outside occurrences cannot always be foreseen.

“If you have a written financial plan, you can weather the derailers,” de Baca said.

Indeed, 29% of those surveyed said that a written financial plan would have helped them better cope with obstacles. And those with financial advisors were much more likely (74%) to have such a plan than those without an advisor (39%).

“I think there’s been a proliferation of financial literacy,” Redmond, of CFP, said. “There are a lot of tools and data out there. But a financial planner can monitor and make sure the plan is followed.”

That monitoring is essential because many times, according to de Baca, “there has been a disconnect between people’s vision and their actions.”

With the emphasis on 401(k) accounts over defined pension plans and the worry over the long-term future of Social Security, all agree that individuals need to come to grips with their new responsibilities.

Setzfand said another constituency can help smooth the way.

“Individuals need to focus on these issues,” she says. “But employers need to help employees recognize their responsibility and how they can prepare for retirement.”

In any case, everyone should plan on running into a derailing event or two.

“One of the biggest preventives is to know history,” Redmond said. “If you look back there’s some kind of apocalyptic market event every four years. Just in the first decade of the 21stcentury we’ve seen two of those events.”

A jolt to retirement plans

Some of the key findings from the Ameriprise “derailers” report:

• $117,000: average cost of derailers;

• Low interest rates: most commonly cited derailer (63%);

• Home equity: one-third foresees less help from this source;

• Five or more: 37% experience this many derailers;

• Family aid: 23% say the needs of a grandchild or child have set back their financial plans.

See also:

Social Security: It’s not all gloom and doom

Beyond the estate tax: Leaving a legacy in a post fiscal cliff world

3 reasons your senior clients need an estate plan


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