4 Reasons Retirement-savings Strategies Fail

Some people fail at retirement savings because they don't create a plan. Others, however, fail because their plan simply isn't up to par.

There are numerous things that can derail people's savings efforts, which helps explain why the retirement savings picture in the U.S. is so grim today. Research from Voya Financial indicates that one-third of those in retirement report having a lower standard of living than they did in their working years and that nearly four in 10 estimate they will likely run out of savings.

"These findings are telling and underscore the need to save -- and starting early," says James Nichols, head of retirement income advice and strategy at Voya Financial. "Even if it is a small amount, 30 years of routine savings and compounded growth can add up to a significant amount."

But while the straightest path to a financially secure retirement -- save early and save often -- is easy to understand, it's also easy for savers to fall victim to some common stumbling blocks. Here are four common reasons why retirement-savings strategies fall short.

1. Overestimating future returns

Even with a financial adviser guiding you, it can be hard to know how much to save. There are so many unknowns, including how the market will perform in the years till your retirement.

Even relatively small variations in returns can add up over the course of decades. For example, a saver who stashes $5,000 per year in tax-deferred accounts for 30 years will end up with more than $418,000 in 2014 dollars, assuming a 6 percent rate of return. But if that rate of return drops to 4 percent, the portfolio will be worth about $289,000 -- in other words, less than 70 percent of the value of the higher-performing portfolio.

Chris Miles, a former financial adviser and stock coach, and now founder of the website Moneyripples.com, says that smart retirement savers don't overestimate their future earnings, and that if they find that their investments are underperforming, they go in search of better options.

"For those that follow this kind of advice, I would suggest overestimating your retirement goals so you won't be caught off guard, or consider alternative investments that could generate higher cash flow returns in retirement," Miles says.

2. Downplaying the impact of inflation

While the inflation rate in the U.S. has averaged 1.9 percent from 2009 to 2013, it has not always been this way. Tradingeconomics.com, an economic indicators website, reports that inflation reached a high in June 1920 of 23.70 percent, and that annual inflation has averaged 3.33 percent from 1914 to 2014. (Of course, there have been impressive lows too, with the lowest reported in June 1921 at -15.80 percent.)

A commonly projected inflation rate is 3 percent, but an individual's or couple's circumstances or habits can make their expenses increase at a higher rate.

The BLS inflation calculator can provide you with more insight into the impact of inflation. It shows, for example, that $50,000 had the same buying power in 1980 as does $144,436 in 2014. So don't assume that your retirement savings target will mean the same at retirement as it does now -- especially if your retirement is decades away.

3. Prioritizing other goals

Sometimes those planning for retirement simply do not put their retirement first, focusing on other goals like paying for their children's college education, paying off debt or even their own home. However, as Nichols points out, there are no loans for retirement while loans for college are readily available.

"Every circumstance is different, but in general, for every dollar an individual puts toward retirement, they can direct 10 cents toward college," he says. "If individuals feel like they are ahead with retirement savings, they could bump up college savings in these last five years before college."

It may be hard to sock away retirement savings while debt of any kind is knocking at the door, and it's important to pay down high-interest credit cards and have a steady cash flow. But to keep retirement savings on track, it's also essential to continue directing some portion of income -- Nichols recommends 15 to 20 percent -- toward savings.

4. Letting emotions get in the way

In the wake of the numerous failures that befell financial institutions during the Great Recession, it may seem like stashing money in the backyard flowerpot is as good a way as any to secure your retirement savings. But Nichols says this kind of short-term thinking is a mistake.

"After experiencing the financial crisis, many investors are hesitant to trust that what they invest will be there when they need it," he says. "So when the market becomes more volatile, investors tend to react without taking into account their time horizon or the benefits of long-term investing."

For nervous investors, it doesn't help that former Federal Reserve Chairman Ben Bernanke recently described the Great Recession as the "worst financial crisis in global history," surpassing even the impacts of the Great Depression, according to The Wall Street Journal. But by knowing your risk tolerance and having a well-diversified portfolio, you can avoid the emotional traps that sidetrack the overly skittish.

"While it's natural instinct to shy away from risk, based on past experience, being too conservative could cause investors to miss out on investment growth over time to help offset inflation," says Nichols. " It's important for investors to keep in mind that if their investments are well-diversified, they are in a better position to ride out the market swings."

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