Something unusual happened last week. I took a call on our financial helpline from Diane Sandoval *not her real name who wanted to know if she was on track to retire at 65 (she was in her early fifties). The question has been a common one this year as we’ve seen a resurgence in calls related to retirement. However, the answer I gave her was an uncommon one. I was able to tell her, “Yes, you are indeed on track to retire –in fact, you are ahead.” After walking through the retirement plan estimator calculator together, we found out that Diane was not only on track to replace 80% of her current gross income in retirement, but she was well past that mark and tracking at replacing over 160% of her salary.
These days this level of retirement security seems like an extraordinary feat. Diane is certainly in the minority with only 14% of employees reporting they are on track to replace 80% (or their goal) of their income in retirement. What is interesting about this caller is that she didn’t get an inheritance, win the lottery or own a chain of fast food restaurants. She was an employee of a Fortune 500 company – the lady next door –who simply made a series of smart choices with her finances. All told, what she did was take complete control of her finances.
We live in a time where it seems like the average person has very little control over their financial life. Homeowners who want to relocate are having a difficult time selling in this housing market. The stock market has experienced extreme volatility in the last few years– with four out of five of the biggest one day point losses in the Dow Jones Industrial Average being recorded in 2008. The landscape of company pension plans has virtually shifted from defined benefit plans managed by the employer to defined contribution plans managed by the employee. Unemployment rates continue to hover over 9%. Baby boomers are delaying retirement due to an uncertain future, locking up jobs that could create opportunities for the Millennials who are looking at a 17% unemployment rate for their demographic. How could an average person be so prepared? She and others like her – “the super prepared” – made a series of smart decisions that impacted their finances to put them in control.
Here are four decisions that differentiate the super prepared from the unprepared:
1. They chose a company with excellent benefits and stayed there. As companies freeze their defined benefit plans, maximizing employee benefits can make or break the ability to retire. For example, Chesapeake Energy Company in Oklahoma City, OK pays a 100% match on their 401(k) up to a 15% contribution. USAA has a robust retirement contribution with a dollar for dollar match up to 8% and contribute 9% above and beyond to a cash balance pension plan. They provide another variable match based on the employees age and provide medical insurance to retirees. Health benefits also matter. Companies that pay 100% of the employees’ health care contributions help to free up dollars for employees to save for retirement. In Diane’s case, she works for a company that has excellent financial benefits and provides unbiased financial education to help her make the most of the benefits provided.
2. They stayed married. There are certainly valid reasons for couples to separate or divorce but those who stay married have a financial advantage. A study by Jay Zagorsky at the Ohio State Center for Human Resource Research reported that divorce reduced a person’s wealth by 77% compared to a single person. Being married almost doubles the comparative wealth (93%). The study found that by getting married there was an increase in wealth of 4% each year with all other factors held constant.
3. They were homeowners with a plan to pay off their mortgage. Controlling and reducing expenses is an important factor in retirement and a renter is at risk since outside forces control their housing cost. We’ve seen this recently with the North Dakota oil boom and influx of eager workers willing to pay high rents while senior citizens are being priced out of the rental market. Where rents used to be $700 per month, they have tripled, forcing elderly seniors to move. As our CEO Liz Davidson states in her blog post on the Next Mortgage Crisis, forgoing equity over the years as well as the eventual impact of not having a mortgage can’t be underestimated. The “super prepared” pre-retirees we talk with are homeowners and have a plan to pay off their mortgage in retirement to reduce expenses.
4. They saved a high percentage of their income. Our caller shared some advice she got years ago from a colleague, “Save all of your raises.” I’ve heard of people who save half their raise or increase their contributions each year by 1% but I’ve never heard of anyone save ALL of their raises. Diane told me that she had not taken an increase in take home pay in 10 years because she has saved it all – all those years. That certainly explains why she has such a high balance in her retirement plan. The factor we have the most control over is our saving percentage.
There are certainly other factors to consider that I didn’t mention such as asset allocation, reducing fees on investments, tax reduction strategies, etc. but sometimes it is the familiar ones that go unnoticed. The “super prepared” employees probably never thought about the fact that it was what they were doing that was “the same” that made the difference in a society where a constant focus is “change,” with new and improved products hitting the shelves every day. New movies premier around the holidays and new car models are introduced every fall. Who knew that staying with the same company, celebrating the same wedding anniversary each year and staying in the same house would lead to financial success? Well, it does when you top it all off with the most important factor and that is making the most of those benefits by saving and investing the difference.
Nancy L. Anderson, CFP ® is Think Tank Director and Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
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