5 risks that can crack your retirement nest egg

  • Getting too far into debt is a huge risk to retirement happiness.
  • Disability or serious disease cannot be predicted but can be hedged against with insurance.
  • Family obligations and emotion investing can also trip up your retirement savings strategy.
Life has a way of throwing different barbs that can crack apparently safe nest eggs.
Jose A. Bernat Bacete | Getty Images
Life has a way of throwing different barbs that can crack apparently safe nest eggs.

When I advise my clients about their retirement, I can't just focus on asking them, "How much are you saving?" or "Do you think you are conservative or aggressive?" These are questions to be addressed.

However, a couple's retirement is dependent on a few other financial disciplines that are interconnected with retirement planning to flesh out the entire discussion. Some have to do with behavior, and others have to do with prudent planning. Life has a way of throwing different barbs at us, and we must be cognizant of how these life risks affect our retirement planning.

Life Risk 1: Being a slave to debt.

If a couple stays healthy, living within their means, are good savers and are either out of debt or working diligently to get out of debt, then this couple has a very good chance of having the type of retirement they dream about. However, if they don't have good spending habits and are constantly enslaved to debt, retirement may be a nightmare instead of the dream they wanted. Knowing the neuroscience behind what makes some people good savers and other good spenders is important. Once they know the triggers that cause them to behave one way or the other, they can start training themselves to either continue to be good savers or to change their habits/addictions they have of constantly spending more money than they have.

Life Risk 2: Developing a serious disease.

I don't know of a person who can determine whether they will develop a serious disease. The only way I know to help stave off complete financial devastation is to have medical insurance or, at least, a catastrophic plan. A family cannot let their family be exposed to this risk without this type of coverage. Everyone gets sick or hurt, some more severely than others, so it is incumbent on us that we plan this risk away to the extent we can for the sake of our spouse and children.

Life Risk 3: Becoming disabled.

It is my professional and humble opinion that people should not start investing until they procure a personal disability policy or at least get covered under their company's group disability plan. A person's retirement depends on income and, if the income stops because of sickness or an accident, the retirement savings stops also.

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If the disability lasts a lifetime or even an extended period, there is no other way to stave off financial ruin than having a replacement of income, and that is exactly what a disability policy would provide.

While the benefit may not allow enough income replacement to save toward retirement, it may be enough so that money isn't being pulled out of the retirement savings already accumulated. The benefit may help to maintain paying everyday expenses without going into debt, missing payments or dipping into retirement savings (on which taxes will be, and penalties may be, assessed).

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Life Risk 4: Parents needing care, or enabling children.

If parents haven't planned appropriately, there may be a need for us to take care of them by either providing funds or stepping out of the marketplace to personally care for them. Either way, much income will be lost to take care of the need. Although there are options for the parent's care, such as Medicaid, this may not always be a palatable choice. People need to make a hard decision on how this risk is to be covered.

Another risk is the enablement of children. Bringing up children in a responsible way that teaches a "hard work" ethic is easier said than done. It seems that more and more young people are born with a smartphone in their hands that creates a gaming addiction in the child instead of wanting to play team sports or doing group activities without the use of an electronic device.

I know this is a generalization and there are circumstances out of our control as to why we need to provide for our children for an extended period or perhaps a lifetime. However, if the older adult child is perfectly healthy and able to do work, the best thing parents can do is to get them off their payroll and allow them to grow up by pushing them out of the house to start fending for themselves.

"The markets, over time, have a way of taking care of us financially if we keep our heads about us."

Life Risk 5: Making emotionally driven decisions during an economic downturn.

When people make irrational decisions during an economic downturn, they can irrevocably ruin the prospects for their retirement. The strategy I use in my practice now makes so much sense, even for older clients. Instead of selling into stock market weakness, we buy into the weakness. With appropriate asset allocation, we have conservative investments and some that are more aggressive.

When the market is going down, we sell some of the conservative investments to buy more of the aggressive investments. Buying more shares of growth-oriented investments sets us up for higher long-term returns by having more shares at lower prices that will later help generate income for us.

Selling a share of growth investments when the market is high will allow us to lock in gains and buy more conservative investments in case there is a market decline so we reallocate to take more conservative stance. Either way, we still have exposure to growth investments. The markets, over time, have a way of taking care of us financially if we keep our heads about us.

(Editor's Note: This column originally appeared on Investopedia.com.)

— By Ted Snow, founding principal of Snow Financial Group

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