Disruptions Take $2.5T Retirement Bite

Major life events—unemployment, divorce, serious health issues, buying a home—can disrupt long-term saving and investing, and negatively impact retirement plans, according to TD Ameritrade’s 2015 Financial Disruptions Survey.

A disruption in a financial plan can have a significant impact on the amount people are able to put away each month for retirement. TD Ameritrade calls people who have experienced an event that cuts into saving for retirement “disrupted Americans.”

The Financial Disruptions Survey explores the impact of these life events on the average American’s long-term saving habits, reveals a frightening economic hit and uncovers lessons learned.

There is an opportunity cost to disruptions: Financial disruptions have cost $2.5 trillion in long-term and retirement savings for Americans. The most common disruption? A loss of employment or having to take a lower-paying job.

A majority of disrupted Americans (84%) were saving for retirement before the disruptive event, with an average of over $500 saved per month. Nearly half of those surveyed (40%) said they felt that having a steady income meant they were prepared for a life-altering event. 

Prior to the disruption, disrupted Americans were most likely to discuss their financial plans with a spouse or partner.

Most disrupted Americans (79%) had to reduce their saving and expenditures during the disruption, and, on average, decreased their retirement saving by almost $300 a month. Half of those surveyed needed to withdraw money from savings or borrow funds.

Disruptions last nearly five years, resulting in $16,000 less being saved per person than would have been without the disruption. Decreasing expenditures, using less credit and repaying debt are the most likely changes made by disrupted Americans to recover financially.

Every human being faces the threat of a financial disruption because there will always be external factors that can upset the course of a person’s life, observes Lule Demmissie, managing director of retirement at TD Ameritrade.

Plan on Disruptions

“The key is to have a financial plan that incorporates risk management because no one knows when these disruptions can occur,” Demmissie says. “Saving and planning for our retirement does not guarantee we will be 100% protected from disruptions, but what it can do is help shelter us from the unexpected and give us a stronger footing in adjusting after a disruption. In retirement planning, time can be an asset or a liability.”

On average, disrupted Americans who are back on track with their long-term retirement goals took almost five years to get there. Yet, half of them (49%) will need to delay retirement or forego it completely. With the benefit of hindsight, disrupted Americans said they would have saved a greater proportion of their income (44%) or started saving or investing earlier for retirement (36%). Another 26% said they wished they had been more educated about long-term saving and investing.

According to a TD Ameritrade survey of retired Baby Boomers, those who successfully prepared for retirement said five things contributed to their success: 

• Limiting use of credit (67%);
• Saving early and consistently (58%);
• Spending less on luxuries/discretionary items (58%);
• Having employment with an excellent salary (56%); and
• Investing in/maintaining a well-balanced portfolio (51%).

Plan participants need to understand their retirement goals, regularly evaluate their portfolios and be prepared to make adjustments to the long-term strategy along the way.

“A retirement plan is adjustable and should evolve over time, so self-directed investors are in a better position to more easily take a hands-on approach to their retirement and investing strategies,” Demmissie says. “While no one can predict when, or if, a financial disruption will occur, the key is to focus on what can be controlled.”

Other findings of the survey are:

• 21% of disrupted Americans do not expect to recover financially from the consequences of the disruption;
• 26% of disrupted Americans check the performance of their investments more frequently since the event;
• 19% say they are more likely to hold investments longer, even if the value fluctuates; and
• 18% discuss their investments with a financial planner or adviser more frequently.

TD Ameritrade estimated the $2.5 trillion loss by way of the following calculation: On average, a survey respondent experiencing a disruptive event will save almost $300 less per month for a period of almost five years, meaning his savings pot will be $16,000 less than it would have been without the event. Sixty-six percent of survey respondents—158 million disrupted Americans out of a possible 240 million U.S. adults—experienced these sorts of disruptions over the course of their lives, translating to a national loss of $2.5 trillion.

The study surveyed 2,019 American adults nationwide who experienced an event or situation that had a negative effect on their financial plans for retirement or the long term. The survey was conducted online between November 21 and 29, 2014, by Head Solutions Group on behalf of TD Ameritrade.

The 2015 Financial Disruptions Survey can be downloaded here, and the survey findings can be seen in an infographic at TD Ameritrade’s website.