10 Forces Conspiring Against Your Savings

BOSTON ( MainStreet) -- Expert after expert, study after study, sing the same chorus: People are just not saving enough for retirement.

BlackRock ( BLK), like many other financial firms, has stressed the disconnect between what savers do versus what they should be doing and the implications of not saving enough for their golden years. A BlackRock survey found that even though relatively few U.S. workers anticipate having to work during their "retirement," defined-contribution plan sponsors think that's exactly what they will need to do.

More than half of plan sponsors (55%) said most of their participants will have to work either full or part time in retirement. Just 15% of those workers, however, anticipated needing to work. Only 43% of sponsors were confident that workers are saving enough to get the monthly income they need for retirement; by contrast, 67% of participants were confident they are saving enough.

What's often overlooked amid the mantra of "save more" is that external, uncontrollable forces are also at work to erode retirement security.

The following are 10 beyond-your-control problems that can derail even the best-laid plans of diligent savers:

National debt

Few would argue against the notion that the nation's staggering debt is setting up an economic disaster. The remedies, however, could prove dangerous for your retirement strategy.

Already there is vigorous debate on how to cut or modify Social Security and Medicare. Also under the microscope: tax incentives to help save for retirement.

A national survey late last year by Lake Research Partners and Public Opinion Strategies -- commissioned by Americans for Secure Retirement -- found that 88% of voters view tax incentives to help save for retirement as important. That included 81% of self-identified tea party supporters, 83% of Republicans, 86% of independents and 94% of Democrats.

Nevertheless, Congress is considering proposals to change the tax preferences for employment-based 401(k) retirement plans. According to the Employee Benefit Research Institute, changes to allowed tax deferrals could result in an average reduction in 401(k) account balances of 6% to 22% at Social Security retirement age for workers now ages 26 to 35.

Europe

It isn't just our domestic debt problems that can hurt your retirement portfolio.

The ongoing debt crisis faced by European and Mediterranean nations will likely remain a drag on our stock market here at home, creating volatility, uncertainty, market drops and even, potentially, the threat of recession.

The antidote is to reduce risk and head for "safe investments" such as bonds and cash. That strategy, however, offers a Catch-22: You reduce risk at the cost of forgoing upward returns, mired instead with the low rewards of inadequate yields. Cash will offer safety, but leave you with dead money.

Time

One of the great benefits of retirement savings is having a long time horizon that, combined with the power of compounding interest, can multiply your nest egg powerfully.

Unfortunately, time giveth, time taketh away. Look no further than those poor folks who were nearing retirement when the Great Recession hit in 2007-08. As many mutual funds floundered, so did those 401(k) plans and IRAs that were heavily invested in them, with many taking a 50% hit to their savings just as their home values also plummeted.

Like so many things in life, investing included, time heals all wounds. But that's assuming you have the luxury of time. When calamity strikes as you draw close to retirement, your game plan can unravel.

Unemployment

There is an obvious downside to unemployment. No job means no regular, automated 401(k) deferrals and employer match. Lacking workplace incentives, and the ease of participation, savings plans can get derailed.

There is also another problem that comes with having multiple jobs throughout your working career: an estimated $1 trillion in orphaned 401(k) plans that are not rolled into another plan or IRA. Lacking care and proper feeding (as in funding) they often just lurk in the background, bleeding away hard-earned cash.

Inappropriate risk

Faced with a potential retirement shortfall and slim returns offered by "safe" investments, many older Americans are taking on too much risk by investing in volatile equities.

Conversely, their kids have been scared into the sort of risk aversion that will keep them from enjoying the benefit of compounding returns over a longer time horizon.

Released last month, a Merrill Lynch survey of Americans with investable assets between $50,000 and $249,999 found that "mass affluent" respondents between the ages of 18 and 34 are much more worried about their financial future than older generations, but less likely to take as many steps to get back on track (even though, at 63%, this group is also most likely to manage their investments on their own).

Dubbed "Generation Worry," Gen Y is worried about the long and short term equally. The age group is also most likely to tap into their long-term savings to pay for short-term expenses (41%), yet are less willing to make changes to meet their financial goals, such as cutting back on entertainment and personal luxuries and keeping the same car longer.

Inflation

Rising prices mean less desire, or ability, to think past short-term needs to long-term planning.

The high cost of everything, over a prolonged time, could also blow your investing assumptions out of the water if you base your plan on an otherwise reasonable assumption of 3% to 3.5% a year in cost of living. Underestimating this cost -- easy to do without a crystal ball -- will eat away at your returns.

Adding insult to injury: The government's inflation calculations don't even include food and fuel. So even if all those economists are claiming a low inflation environment, your pocketbook may disagree.

Added to the mix are family expenses. The Merrill Lynch survey found that 56% of mass affluent parents have paid or expect to pay more to send their first child to college than they had expected when the child was born.

Interest rates

Rubbing salt into the wounds caused by inflation is the current low-interest rate environment. Interest rates on those "safe" investments such as Treasury notes are minuscule thanks to Fed policy.

It is a double-edged sword for many planning for retirement. Even though higher interest rates would help their portfolio, shifting mortgage rates may slow home sales -- bad news if selling your home is part of the nest egg plan.

Gas prices

Nobody likes rising gas prices, but are they really so bad? Is a hike of 50 cents a gallon really the budget buster many feel it is?

For many, the answer is no. But there are psychological as well as mathematical factors at play. Because gas prices are volatile, can change quickly and fuel is a weekly purchase, we are even more aware of those changes than other costs we face. When consumer confidence dips, many may hold off upping their 401(k) deferral or pumping extra bucks into an IRA.

And if you don't keep an eye on the various holdings of your mutual funds and ETFs you may take a hit from the impact of fuel costs on food companies, airlines, retailers, auto makers and transportation interests.

Higher gas prices also traditionally lead young workers to cluster closer to where they work, forgoing the longer commutes that come with living in the suburbs. Once again, bad news if selling your home is part of your getting-ready-to-retire planning.

Health care

Talk of supermarket inflation and high gas prices may obscure the biggest drain on even the most robust retirement plan.

According to the Center for Retirement Research at Boston College, health spending, as a percentage of after-tax income, was about 16% in the year 2000; it estimates that share to rise to 35% by 2030.

A study last year by Fidelity Investments estimated that a 65-year-old couple retiring that year could expect to need more than $230,000 to pay for medical expenses, not including nursing-home care.

Those costs could be even higher in the future if budget woes lead Congress to increase out-of-pocket expenses for Medicare recipients.

Longevity

Americans are living longer than ever, but that benefit of modern medicine has costs that go beyond doctor bills.

In a recent analysis of government data, the University of Washington's Institute for Health Metrics and Evaluation found that the average life span for men (in 2009) was 76.2 years (up 4.6 years since 1989). Women lived, on average, to 81.3 years, a 2.7 year increase since 1989.

But living longer means that making your money last is even more of a challenge. Its a change that, according to the BlackRock survey, may still be sinking in.

Even though 70% of plan sponsors think their plan has been helpful in warning employees if they are not saving enough money to last through retirement, just 41% of employees share this view. Sponsor and worker views of plan helpfulness also diverged on such matters as educating employees on the realities of longevity in retirement (78% vs. 52%), and helping employees "get through retirement, not simply reach it" (71% vs. 50%).

-- Written by Joe Mont in Boston.

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