Tim Steffen, director of financial planning for Baird, notes that there are unexpected “threats” to retirement planning. Some of the external threats that can affect people's retirement plans as retirement draws close is job loss, divorce, death of a spouse or facing a down market. Here he talks to Christine Benz, Director of Personal Finance for Morningstar, on how investors must prepare for them.
One of the biggies that you talked about is job loss later in life. In such an eventuality, what must one do to stay at least somewhat on track?
The immediate thought is, well I have lost my job, maybe now is my time to take that early retirement. You want to do some budgeting to make sure you can afford to live on that reduced income. By losing your job earlier, leaving the workforce earlier than you planned, you are saving less, you are spending sooner, you've got less to put toward paying down debt.
Maybe your plan had been to have debt all paid off by the time you retire. Now you've got to rework that plan.
So, rethink about your budgeting a little bit, figure out your new income level and new spending level.
If you are married, maybe that spouse might have to change his or her plan a little bit, too, and perhaps work a little longer, something to kind of help support that family budget.
Both might have to work longer if one person is out of the workforce for a year or two.
Absolutely. Be realistic.
If you have been out of the workforce for a couple of years, you are probably not going to be able to go back in at the same type of position, at the same pay level you were at before. You may have to take something that's maybe not exactly what you were doing before at the same pay level.
So just go in eyes wide open and understand that things have changed, and you are going to have to adapt to that.
This is why we always tell people to have an emergency fund set aside. How big should the emergency fund be?
As big as you can handle. As big as you can afford it to be.
Typically, an emergency fund is mostly cash. You don’t want to put all your portfolio in cash obviously because you need some growth. So, you want to have enough set aside to at least cover a few months’ worth of expenses.
Sometimes that emergency fund can also be not literally cash, but maybe access to cash somewhere else, like maybe a line of credit, a home equity loan you could tap into if you needed to.
So, emergency funds don't necessarily have to be physical cash that's available to you but just access to some liquidity is the main thing.
Generally speaking, the higher the earner you are and the more specialized your career, the bigger cash cushion to be set aside?
Certainly. Because as you moved up in your career, probably your needs, your lifestyle is such that it would be a tougher adjustment to have to dial that back real far. So, the bigger your lifestyle is now, the more you are going to have to prepare for if something were to change.
Death of a spouse as retirement approaches. How does this change life for someone as retirement approaches?
From a financial standpoint, one of the things we always encourage is make sure you've got enough protection in the form of life insurance. Now obviously, life insurance is something you can't buy after death. You don't want to buy it when you are in retirement, its usually very expensive. So that's part of planning ahead. Build that life insurance portfolio up ahead of time.
How long should you hang on to life insurance? Some people think, I am retired, my kids are out of the house, I have no dependents…. What do I need life insurance for?
Life insurance is there to either protect an income stream or to provide some other source of funding during retirement. If a big part of your retirement plan is an income source coming from one of the spouses, if that income source goes away you need to replace that.
There are other ways to do that. You can do joint and survivor annuities, for example.
Many pension benefits will come in the form of an annuity where you can take a single life where it's just during your lifetime, at your death it goes away, or some sort of joint benefit meaning after your death your survivor gets some percentage--could be 100%, it could be 75%, 50%, could be any number of options.
If you are going to take a pension then make sure that if something happens to you, your survivor is protected. Sometimes they do that using these joint annuities.
So, the unifying theme is to try to be preemptive, try to get some advice, because an adviser can help you troubleshoot the what ifs that could affect the viability of your retirement plan.
This all goes back to having a financial plan done. You don't wait until the emergency happens to figure out how to respond to it. You prepare ahead of time. So, somebody who works with a good financial adviser, just putting together a good plan is going to look at some of those scenarios and say, what happens if one of you were to pass away early. What happens if you decide, either voluntarily or involuntarily, to leave the workforce early. What if there is a divorce, that's going to be tricky one obviously, but having a financial plan in place that accounts for those scenarios can help make the transition into those a lot easier.
