NEW YORK (MainStreet) — Veronica Evans lived happily in Alaska until her elderly father was placed in a retirement home against his will. The professional taxi driver ultimately relocated to Texas, hired an attorney and began driving seven days a week. Since then, probate court challenges and legal fees have piled up.
“It would be great if I could save money, but everything I earn goes towards paying my attorney,” Evans told MainStreet.
Some 49% of Americans whose life has been impacted by a disruptive event will need to delay retirement and forego it completely, and 66% have seen their long-term and retirement plans interrupted, which have cost $2.5 trillion in losses, according to TD Ameritrade’s 2015 Financial Disruptions survey.
“You can prevent external factors from disrupting retirement savings by having a plan in place,” said Taylor Schulte, certified financial planner with Define Financial, a wealth management firm in San Diego. “Without a plan, you are likely to make poor decisions with your money that could put your financial health in jeopardy.”
Experiencing a disruption to finances can impact the amount of money put away each month for retirement. That’s because life events are often time consuming and costly.
“For that reason, they typically divert our attention away from planning for the future to dealing with the current situation at hand,” Schulte told MainStreet.
A rule of thumb when stuck in the middle of an unexpected live event is to always pay your mortgage or rent bill.
“Never risk your home,” said Aimee Bennett, principal with Fagan Business Communications in Castle Rock, Colo. “Always pay for your home before paying any other bill. Do not borrow excessively with home equity lines, because if you lose your home in an emergency, you'll be stuck with no income, no residence, possibly no equity and yet all of your old bills.”
Life events that could potentially detract from retirement savings include unemployment, divorce, elder care, family death, disability and even buying a home; however, a loss of employment or having to take a lower-paying job is cited as the most common.
“With the benefit of hindsight, those who suffered disruptions said that they would have saved a greater portion of income, saved earlier, educated themselves more about long-term planning and saving and held more of their retirement money as savings rather than investments,” said Lule Demmissie, managing director of retirement with TD Ameritrade.
Prior to the disruptive life event, 84% surveyed said they were saving more than $500 a month and during the disruption, 79% reduced their retirement savings by nearly $300 a month.
“The recovery time from a financial disruption is nearly five years, and during that time, the average American loses more than $16,000 in retirement savings,” Demmissie said.
Experts advise not borrowing from a retirement account to fund an unexpected disruptive life event.
“Borrowing from your 401(k) is a horrible idea because you lose money,” said Kris Miller, certified senior advisor and estate planning specialist in Hemet, Calif. "Most plans have a provision that prohibits from making additional contributions until the loan balance is repaid. Even if your plan doesn't have this provision, it may be unlikely that you can afford to make future contributions in addition to servicing the loan payment."
In order to recover financially, disrupted Americans tend to decrease their expenditures, use less credit and repay debt.
“If you’re carrying a credit card balance, getting your interest rate reduced will directly save you money each month,” Miller told MainStreet. “Just flip over your credit card, call the number on the back, ask to speak to a supervisor and request that the rate be reduced.”
Certain disruptive life circumstances, such as spousal death, illness or disability can be scuttled with insurance.
“We call them high-impact, but low-probability events,” said Cal Brown, certified financial planner with Savant Capital Management in McLean, Va. “We cannot prevent these events caused by external factors that are beyond our control however we can assess their likelihood and use a variety of financial tools, such as life insurance, disability income insurance, health insurance and long term care insurance.”
—Written by Juliette Fairley for MainStreet