If You Could See Your Future Regrets About Finances
We rue most the failure to expect life’s unpleasant surprises
Widespread failure to start saving early enough and in sufficient quantity — procrastination, essentially — dominates the discussion among experts on how to solve the nation’s retirement savings crisis.
Retirement calculators, lessons on the miracle of compounding and pleas to work longer and put off claiming Social Security all are aimed at the broad goal of getting people to save earlier, bigger and for longer. Don’t procrastinate.
But what if people, looking back on their lives — and their often-insufficient savings — don’t see it that way? Suppose they see the savings shortfall as a result of something that happened to them, rather than something they failed to do? A career derailed. Health problems. Investments gone bad. Divorce. “I was saving diligently and then got tripped up.”
The solution is the same regardless of the nature of the regret, of course: Save more and earlier as a buffer against ill fortune, and, as experts have long preached, against the blessings of longevity. But understanding how people frame the regret could be important to motivating them to save more and earlier.
A study published by the National Bureau of Economic Research found, in a survey of 60- to 79-year-olds, roughly 59% of people regretted not saving more. No surprise there. What was unexpected, though, is that of those with regrets, 66% blamed unexpected events for the regret. In the researchers’ words, that sizable majority “reported experiencing a shock earlier in life leading to adverse economic consequences.”
Just 43% copped to plain old regret of not having saved more.
A troubling side note: 38% of those with any regret about not saving more said Social Security benefits were less than they had expected. Don’t be among those 38%; use the Social Security Administration’s benefits estimator so you know exactly what’s coming your way.
The regret research is particularly timely as we’re in the midst of an enormous economic shock, the coronavirus recession. Decades from now, if the research holds true, many with insufficient retirement savings will note that they were unemployed during the pandemic, or that health problems interrupted their careers, among other ill effects. So, some advice:
Count on shocks. We have no idea when the next economic meltdown will hit, nor the particular contours of its cause and path. But here’s what we do know: We’ve had two of them in a dozen years. That should be all the evidence you need to want to build financial insulation for the next one. And the one after that.
What’s more, few families entirely escape the pain of extended joblessness, chronic health problems, divorce or the unexpectedly large financial penalties of caring for children or aging parents. Life viewed in this context seems to cry out for a very large financial buffer. Even if you’re sailing along free of these troubles, each time you see someone else suffering from them, remember it could be you, so save like it will be.
To do that, examine your spending, including the smaller items.
And the really big spending items.
Seek out the best solution, not the easiest. In times of stress it is understandable to look for the quickest fix. That can often mean tapping retirement savings early. A survey of 401(k) savers this past summer reported that nearly one in three had taken an early withdrawal or loan from their 401(k) amid the COVID upheaval.
But as recent as that decision was, more than half who took out money have already expressed regret at their decision. The most oft-cited regret trigger: They didn’t fully realize the long-term consequence (it can cause a dramatic reduction in savings at retirement), and they weren’t aware they might have had other options. For example, many homeowners were granted a moratorium on mortgage payments.
In the heat of the stress, the ability to raid one’s retirement was hard to resist. Especially given Congress’ coronavirus decision to make it even easier to raid larger sums, and take up to three years to pay the tax bill. To be clear, an early withdrawal may indeed be the right move for your household, but it should be the last move you consider. Not the first. Or the only.
This is where working with a financial planner can lead to better decision-making. Granted, it seems odd to suggest spending money on a planner when you’re worried about not having enough money. But avoiding big mistakes is a foundation of financial security.
And don’t wait for the next crisis. Having those conversations now, doing the number-crunching, making the spending/savings decisions today is how you set yourself up to better navigate the next economic shock.
Here’s more about finding financial advisors.