MONEY Sports

Why NFL Players Are So Likely to Declare Bankruptcy

Former Tampa Bay Buccaneers defensive tackle Warren Sapp wipes his face as he is inducted into the team's Ring of Honor during half time in an NFL football game against the Miami Dolphins Monday, Nov. 11, 2013, in Tampa, Fla.
Brian Blanco—AP Former Tampa Bay Buccaneers defensive tackle Warren Sapp wipes his face as he is inducted into the team's Ring of Honor during half time in an NFL football game against the Miami Dolphins Monday, Nov. 11, 2013, in Tampa, Fla.

Retirement is supposed to represent one's golden years. But for former NFL players—who are typically out of the game by age 30—retirement is often accompanied by a slew of problems.

According to a new study in the National Bureau of Economic Research (NBER), former NFL players go broke at an alarmingly high rate considering how much money they make as pro athletes.

The median NFL player is in the league for six years and during that time earns $3.2 million in 2000 dollars—more than a typical college graduate makes in a lifetime, noted this Quartz post. And yet, nearly 16% of the players included in the study—everyone drafted from 1996 to 2003—filed for bankruptcy within 12 years of retirement.

A 2009 report from Sports Illustrated found that “78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce” after they’d been retired only two years. Some of the stories of pro athletes losing their fortunes, chronicled in the ESPN documentary “Broke” and elsewhere, are astonishing. Warren Sapp, the seven-time Pro Bowler and Hall of Fame defensive tackle, earned $82 million during a 13-year career that ended in 2007. By the spring of 2012, however, he filed for bankruptcy, even though he was still pulling in $116,000 per month at the time as a TV analyst.

What is it about so many professional athletes—and football players in particular—that causes them to go broke in swift and dramatic fashion, despite their lofty salaries? Here are some the key factors–several of which can potentially screw up the retirement plans of anyone, not just a pro athlete.

NFL careers (and peak earning years) are short. The average annual salaries and career lengths for NFL players are smaller than their counterparts in other big-time sports. A 2013 study showed that the average (as opposed to the median noted above) NFL player earned $1.9 million per year and was in the league for 3.5 years. Both are much lower than the averages in Major League Baseball ($3.2 million annually, 5.6-year career) and the National Basketball Association ($5.15 million, 4.8-year career).

Not only do NFL players tend to earn less overall, their careers are over much more quickly. The typical NFLer is out of the game and done with his peak earning years well before he’s even turned 30. This is when the typical worker’s earning potential is just taking off.

They ignore sound investing advice. “If they are forward-looking and patient, they should save a large fraction of their income to provide for when they retire from the NFL,” the NBER study explains. But many NFL players are neither forward-looking nor patient, and they don’t save much, if anything. That goes even for players with good careers, per the study: “Having played for a long time and having been a successful and well-paid player does not provide much protection against the risk of going bankrupt.”

In the opening anecdote of the Sports Illustrated story, Raghib (Rocket) Ismail, the Notre Dame superstar who played in the CFL and NFL and earned as much as $4.5 million per year, recalled how impervious he was to financial advice early on in his career. “I once had a meeting with J.P. Morgan,” he said, “and it was literally like listening to Charlie Brown’s teacher.”

They get bad advice and make bad decisions. Ismail blew money on a wide range of sketchy investments, including a religious movie, a music label, and various high-risk restaurant and retail endeavors. Many players have sued their advisors after allegedly being scammed out of millions. In one suit filed in 2013, a group of 16 former and current NFL players claimed they were collectively bilked for more than $50 million based on the actions of an advisor who had allegedly invested the money in an illegal casino.

“Regulated or not, shady advisors have made quite a mark on the NFL financial scene,” the authors of the 2014 book Is There Life After Football? Surviving the NFL wrote. “Before closer scrutiny was instituted, at least 78 players lost more than $42 million between 1999 and 2002 because they trusted money to agents and financial advisors with questionable backgrounds.”

More recently, seven-time Pro Bowler Dwight Freeney sued Bank of America for $20 million, because a former adviser from the bank supposedly defrauded him by (illegally) wiring millions of dollars out of Freeney’s account. In another recent case, it is a former NFL player who is himself being accused of operating a sketchy investing scheme. In early April, the SEC filed a federal fraud complaint against former NFL player Will Allen and a business associate, who together allegedly ran a Ponzi scheme, using money from some investors to pay off others. The operation was supposed to be loaning money to athletes who were short of cash, but the suit claims roughly $7 million raised from investors was used instead for personal expenses of Allen and his associate.

They get used to a certain lifestyle. Warren Sapp reportedly had 240 pairs of collectible sneakers, including 213 sets of Air Jordans, which wound up selling for more than $6,000 at auction. Former standout wide receiver Andre Rison famously blew $1 million on jewelry and routinely walked around clubs with tens of thousands of dollars in cash in his pockets, he recalled in the “Broke” documentary. Troubled cornerback Adam “Pacman” Jones has said that he once dropped $1 million in a single weekend in Las Vegas.

Extravagant spending is ingrained in NFL culture, insiders say. “Around the locker room, players’ cars, clothes, houses and ‘bling’ are constantly scrutinized. If they’re not up to par, they’re ridiculed,” former Green Bay Packers’ George E. Koonce, Jr. and his fellow authors explained in Is There Life After Football? “Players don’t see their bills or keep track of their payments. They’re in the dark about taxes. They lose touch with their own money.”

Once they retire and the millions stop flowing into their bank accounts, many players find it impossible to dramatically shift gears and adapt to life on a limited fixed income. It’s all the more difficult because they’re still relatively young and aren’t anywhere near ready to embrace the sensible, low-key, downsized lifestyle of the typical 70-year-old retiree.

They’re often crippled, mentally and physically. The consensus is that of all the major pro sports, football takes the largest toll on the minds and bodies of its combatants—making it exceptionally difficult to make a living once their (short) athletic careers are over. Studies show that players suffer concussions at disturbingly high rates, and that the frequent brain injuries of players cause a wide range of neurological problems down the road. The high level of former NFL players committing suicide (Junior Seau among others) has been tied to concussions in football games as well.

Even if players retain their cognitive skills, they often live with chronic pain in knees, hips, and joints. Debilitating pain, debilitating brain disease, or both obviously hamper one’s ability to make a living outside of football.

UPDATE: An earlier version of this story included widely disseminated information regarding the likelihood of lower life expectancy among former pro football players. Harvard researchers working on a multi-year project with the NFL concerning the medical risks of playing football say the information is outdated and inaccurate. The NFL disputes the data indicating that its players have shorter life expectancies as well, pointing to a 2012 National Institute for Occupational Safety and Health study in which researchers “found the players in our study had a much lower rate of death overall compared to men in the general population. This means that, on average, NFL players are actually living longer than men in the general population.”

The same study also found that NFL “players may be at a higher risk of death associated with Alzheimer’s and other impairments of the brain and nervous system than the general U.S. population. These results are consistent with recent studies by other research institutions that suggest an increased risk of neurodegenerative disease among football players,” though the report noted that the “findings do not establish a direct cause-effect relationship between football-related concussions and death from these neurodegenerative disorders.”

MONEY Careers

A Good Reason to Tap Your Roth IRA Early

Concentrating surgeons performing operation in operating room
Alamy

You shouldn't always wait until you retire to pull money from your retirement account.

The Roth IRA is a great tool for retirement savings. But here’s something not as well-known: It’s great for developing your career as well.

Many of my young clients in their 20s and 30s struggle to balance current spending, saving for the next 10 years, and stowing away money for retirement. With so many life changes to deal with (weddings, home purchases, children, new jobs), their financial environment is anything but stable. And their retirement will look completely different than it does for today’s retirees.

To my clients, separating themselves from their current cash flow for the next 30 years feels like sentencing their innocent income to a long prison term.

They ask, “Why should we save our hard-earned money for retirement when we have no idea what our financial circumstances will be in 15 years, never mind 30? What if we want to go back to school or pay for additional training to improve our careers? We might also decide to start a business. How can we plan for these potential life changes and still be responsible about our future?”

The answers to those questions are simple. Start investing in a Roth IRA — the earlier you do it, the better.

There is a stigma that says anyone who touches retirement money before retirement is making a mistake, but this is what we call blanket advice: Although it’s safe and may be correct for many people, each situation is different.

The Roth IRA has very unique features that allow it to be used as a flexible tool for specific life stages.

Unlike contributions to a traditional IRA, which are locked up except for certain circumstances, money that you add to a Roth IRA can be removed at any time. Yes, it’s true. The contributions themselves can be taken out of the account and used for anything at all at any time in your life with no penalty. And, like the traditional IRA, you can also take a distribution of the earnings in the account without penalty for certain reasons, one of which is paying for higher education for you or a family member. (Some fine print: You’ll pay a penalty on withdrawing a contribution that was a rollover from a traditional IRA within the past five years. And you’ll have to pay ordinary income taxes on an early Roth IRA withdrawal for higher education.)

Although you shouldn’t pull money from your retirement account for just any reason, sometimes it’s a smart move.

Let’s say you graduate from college and choose a job based on your major. This first job is great and helps you get your feet wet in the professional world. You’re able to gain some valuable real-world experience and support yourself while you enjoy life after school. And this works for a while…until one day, 10 or 15 years into this career, you wake up and begin to question your choices.

You wonder if this career trajectory is truly putting you where you want to be in life. You think about changing careers or starting a business, but you need your income and have no real savings outside of your retirement accounts.

Now, let’s also say that you were tipped off to the magic of a Roth IRA while you were in college and you contributed to the account each year for the past 15 years. You have $75,000 sitting in the account, $66,000 of which are your yearly contributions from 2000 through 2014. It’s for retirement, though, so you can’t touch it, right? Well, this may be the perfect time to do so.

I recently spoke to a someone who did just this. Actually, his wife did it, but he was part of the decisionmaking process.

The wife has been working for years as a massage therapist for the husband’s company. Things were going quite well, but she had other ideas for her future. She wanted to go back to school to get her degree as a Certified Registered Nurse Anesthetist. The challenge was that this education was going to cost $30,000, and they did not have that kind of money saved.

So, they brainstormed the various options, one being to tap into his Roth IRA money. They determined that this would be a good investment for their future. Once the wife became a CRNA, her annual earnings would rise an estimated $20,000 — money they could easily use to recoup the Roth IRA withdrawal (though the 2015 Roth IRA contribution limit is $5,500 for those under 50 years old).

This decision gave them a sense of freedom. The flexibility of the Roth allowed them to choose an unconventional funding option for their future and gave the couple a new level of satisfaction in their lives.

And, that’s what it’s all about. We have one life to live, and it’s our responsibility to make decisions that will help us live happily today, while still maintaining responsibility for tomorrow.

Whether your savings is in a bank account or a retirement account, it’s your money. Although many advisers will tell you otherwise, you need to make decisions based on what is best for you at various stages of your life. The one-size-fits-all rule just doesn’t work when it come to financial planning. There is no need to rule out a possible solution because society says it’s a mistake.

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Eric Roberge, CFP, is the founder of Beyond Your Hammock, where he works virtually with professionals in their 20s and 30s, helping them use money as a tool to live a life they love. Through personalized coaching, Eric helps clients organize their finances, set goals, and invest for the future.

MONEY Retirement

The Pros and Cons of Hiring a Financial Adviser

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: Should I use a financial adviser to manage my retirement portfolio or should I save money by going it alone? – Carl Vitko, Cicero, Illinois

A: That depends on how comfortable you are doing it yourself. If you are familiar with the basic concept of asset allocation and you’re comfortable choosing investments, you shouldn’t have any trouble building a low-cost diversified portfolio on your own, says Robert Stammers, director of investor education at the CFA Institute.

But you don’t necessarily have to pay an adviser to get help. Most people have the bulk of their retirement savings in a 401(k). Many 401(k) plans offer low-cost index funds and target date funds; the latter is a diversified stock and bond portfolio that becomes more conservative as you age. Many employer plans also offer free tools to help you assess your investing options and assemble a portfolio appropriate for your age and risk tolerance. According to the Plan Sponsor Council of America’s annual survey of 401k plans, 41.4% of plans offer some kind of investment advice.

Taking advantage of that advice can pay off. In a recent Voya Financial survey of full-time workers, people who saved the most for retirement used online financial advice tools and educational materials provided by their employers at more than double the rate of the lowest-scoring savers.

But the do-it-yourself approach requires time to monitor your portfolio and the discipline to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile, which investors admit they have a hard time doing. In a survey by Natixis Global Asset Management, 65% of investors say they struggle to avoid making emotional decisions about their money during market shocks.

Even more worrisome: 81% of investors say expectations for double digit gains going forward are realistic and 54% believe their portfolios will perform better this year than in 2014, when the Standard & Poor’s 500 Index rose by 13%, according to the Natixis survey.

Coming off three consecutive years of market returns that exceed 10%, that kind of enthusiasm is not surprising. But historically, the stock market has averaged 7% annual gains. Having an objective investment adviser can help ground your expectations in reality. And there’s evidence that some investors do better getting some professional advice.

Median annual returns for 401(k) holders who got professional help through target date funds, managed accounts, or their plan’s online advice were 3.32 percentage points higher than returns for people who invested on their own, even after taking fees into account, according a 2014 study by benefits consultant Aon Hewitt and Financial Engines, which provides investment advice to 401(k) plans.

If you decide to go the professional route, you have choices. An adviser at a large investment firm typically charges a fee of about 1% of the assets he or she manages for you. A new type of investment service known as a “robo-adviser” uses computer algorithms to build low-cost portfolios and charges as little as 0.5% a year. (To better understand how robo-advisers work, read “Would You Trust Your Retirement to a Machine?“)

You should consider enlisting a financial adviser who can do more than manage your investments. A certified financial planner (CFP) takes a more holistic approach to your retirement readiness. They can help you figure out whether you are on track with your savings and how other investment options, such as Roth and traditional IRAs, fit into your retirement plans. Best to go with a CFP who charges a fee for advice versus one who takes commissions on products he or she sells you. That cost can range from $2,000 to $5,000 a year. You can find fee-only planners through the Financial Planning Association and National Association of Personal Financial Advisors.

If you decide to go it alone, you’ll need to be vigilant about monitoring your plan, and should take advantage of any free advice available to you through your 401(k) provider. But as you get nearer to retirement, consulting at least once with a professional and reputable financial adviser is a wise move, says Stammers.

MONEY 401(k)s

1 in 3 Older Workers Likely to Be Poor or Near Poor in Retirement

businessman reduced to begging
Eric Hood—iStock

Fewer Americans have access to a retirement plan at work. If you're one of them, here's what you can do.

A third of U.S. workers nearing retirement are destined to live in or near poverty after leaving their jobs, new research shows. One underlying cause: a sharp decline in employer-sponsored retirement plans over the past 15 years.

Just 53% of workers aged 25-64 had access to an employer-sponsored retirement savings plan in 2011, down from 61% in 1999, according to a report from Teresa Ghilarducci, professor of economics at the New School. More recent data was not available, but the downward trend has likely continued, the report finds.

This data includes both traditional pensions and 401(k)-like plans. So the falloff in access to a retirement plan is not simply the result of disappearing defined-benefit plans, though that trend remains firmly entrenched. Just 16% of workers with an employer-sponsored plan have a traditional pension as their primary retirement plan, vs. 63% with a 401(k) plan, Ghilarducci found.

Workers with access to an employer-sponsored plan are most likely to be prepared for retirement, other research shows. So the falling rate of those with access is a big deal. In 2011, 68% of the working-age U.S. population did not participate in an employer-sponsored retirement plan. The reasons ranged from not being eligible to not having a job to choosing to opt out, according to Ghilarducci’s research.

She reports that the median household net worth of couples aged 55-64 is just $325,300 and that 55% of these households will have to subsist almost entirely on Social Security benefits in retirement. The Center for Retirement Research at Boston College and the National Institute on Retirement Security, among others, have also found persistent gaps in retirement readiness. Now we see where insufficient savings and the erosion of employer-based plans is leading—poverty-level retirements for a good chunk of the population.

At the policy level, we need to encourage more employers to offer a retirement plan. On an individual level, you can fix the problem with some discipline. Even those aged 50 and older have time to change the equation by spending less, taking advantage of tax-deferred catch-up savings limits in an IRA or 401(k), and planning to stay on the job a few years longer. That may sound like tough medicine, but it’s nothing next to struggling financially throughout your retirement.

MONEY Financial Planning

Why I Want Clients to Get Emotional About Retirement

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Chutima Chaochaiya—Shutterstock

Digging deep into clients' emotions helps one planner uncover what they're really thinking.

I like to delve into clients’ emotions and feelings. People may tell me one thing initially, but upon further questioning may see that their first response wasn’t emotionally true.

One example of that came up in a recent meeting with a couple who were getting ready to retire. Of course, they had worries about what they should do.

They wondered if they should move all their money into conservative investments. They floated the idea of moving everything into an annuity — an option they believed carried no risk.

When I asked them about longevity in their blood lines, I learned they each had at least one parent in their mid-90s. I then explained to them how we are in a low-rate environment and talked about the danger that their annuities would be capped at very low rates of return that likely would not keep pace with inflation or taxes.

That’s where my emotional questioning began. Let me summarize our conversation:

Question: The chance of your living another 30 to 40 years is extremely possible. How do you feel about that?

Answer: That we won’t have enough money.

Q: How does that make you feel?

A: Afraid and very uncertain.

Q: When you started work and got married, what were the rules?

A: Save money in a retirement account, have children, and make sure they get good education.

Q: What are the rules in retirement?

A: We don’t know of any other than just making your money last.

Q: If all of us are living longer, and you know that certain health care costs and taxes are going up, why would you not want to grow your money? Why would you want to buy this financial product that is not designed to keep pace?

A: That’s just what we were told. And that’s what we thought you did as an adviser.

Q: Well now that you are here, how do you feel about this happening?

A: We are very uncertain and really don’t know what to do!

Q: Has anyone worked with you to put together a plan that is balanced with investments and also has an income component that is adjustable for you?

A: No

Q: If you could become more educated on a balanced plan and how that may help you navigate the next 30 years, how would that make you feel?

A: It would make us feel like we have a chance to succeed.

When clients say that they do not want to lose any money, my response is, “Okay, but how do you feel about not making any money?” They don’t like that idea either.

In today’s marketplace, “no risk” equals minimal return and loss of purchasing power.

It is very important to educate clients on current economic conditions and teach them that calculated risk is worth taking. The average retiree who has a net worth of, say, $500,000 to $1 million either falls prey to annuity salesman or is so shell-shocked from 2009 that he or she only trusts CDs.

There is a real need to educate clients on how rates work and why the market have been the place to be for the past six years. Retirees also need greater clarification on annuities in order to understand their income and growth restrictions.

Asking questions to gauge risk is key to financial success. More importantly, it is key to building a sound relationship between adviser and client.

I always ask my clients, “In the next one to two years, what do I need to make happen to assure you that you have made a good choice in working with me?” These answers vary, but generally speaking, clients want to know that they are staying on the right path and are not falling behind. Keeping in touch with clients and knowing how they feel emotionally is paramount to them feeling good about their adviser.

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Matt Jehn, CFP, is managing partner of Royal Oak Financial Group, which offers small businesses and individuals in Columbus and Lancaster, Ohio a complete financial solution through professional accounting, tax and wealth management services. Jehn, who earned a degree in family financial planning from The Ohio State University, enjoys helping his clients grow their businesses by educating them on the meaning behind the numbers.

TIME

5 Money Habits of the Filthy Rich You Can Learn Now

How to save and invest your way to seven figures

Think it’s impossible to save a million bucks? It’s not. Fidelity Investments took a look at the 401(k) portfolios of its clients to see if those in the million-dollar-plus club have characteristics that make them stand out from the crowd.

Surprisingly, being super-rich wasn’t one of them. Although the average annual earnings of people with more than $1 million in their 401(k) was a substantial $359,000, Fidelity found that a number of these people had reported earnings of under $150,000.

As of the end of last year, more than 72,000 Fidelity clients had 401(k)s with more than $1 million in them — that’s more than double the number who had reached that monetary milestone just two years ago. Sure, investors across the board have benefitted from the stock market’s recovery, but the most retirement-ready people also displayed some specific saving and investing habits that helped them reach their goals.

They go slow and steady. “They really took a long term approach… took most of their careers to get there,” says Fidelity retirement expert Jeanne Thompson. The average age of Fidelity’s 401(k) millionaires is just under 60, and have been in the workforce for 30 years. It’s also worth noting that many of the people with the healthiest nest eggs also started saving for retirement early. “It’s not like it happened overnight,” Thompson says.

They max out their contributions. Fidelity found that million-dollar investors contribute roughly 14% of their income towards their 401(k)s — $21,4000 a year, on average. Now, this is above the annual amount workers under 50 are allowed to contribute — those workers are capped at contributing $18,000 a year in 2015 — but the average age of Fidelity’s million-plus 401(k) clients skews about 10 years higher than that. In other words, the most aggressive retirement savers seem to ramp up their contributions once they get the legal go-ahead to sock away more. By contrast, those with portfolios under $1 million contribute only $6,050 a year.

They don’t rely on target date funds. Target date funds have been pitched as a kind of “set it and forget it” option for investors, but a peek into the portfolios of the people who accrued $1 million or more shows that they don’t rely on them entirely or even primarily. As of the end of 2014, about 40% of these investors’ portfolios is in domestic equities, another 12% is in company stock and 6% is in foreign equities, on average. Only 10% of the average portfolio is allotted to target date funds.

They stay in equities. “To some extent, if you’re invested in cash you’re only going to have what you put in,” Thompson says. “Many people may be in retirement for 30 years or more,” she points out, so people might want to reevaluate if or when switching to a more conservative allocation is right for them. “As people are working longer and living longer, many will hold higher equity allocations,” she says. “You still have 30 years your money has to last…If you go too conservative too early you might not keep up with inflation.” On average, about three-quarters of the holdings of millionaire 401(k) clients are in equities — and remember, these are investors with an average age of around 60.

They don’t panic. “The key is when the markets go down not to panic,” Thompson says. Although it can be scary watching those numbers go down, selling at a loss only makes it harder to recover when the market eventually recovers. “They did bounce back, and so they’re were able, as equities rose, to ride the upswing,” Thompson says.

MONEY retirement planning

3 Ways to Be Sure You’re Not Fooling Yourself About Your Retirement Readiness

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Abrams/Lacagnina—Getty Images

Having a plan is important. But so is knowing whether your plan is realistic.

Are you on track toward a secure retirement? Before you answer, consider this: A new study shows that many people who aren’t preparing well for retirement apparently think they are—while others who actually are on track may erroneously believe they’re not.

In a recent study titled “Do U.S. Households Perceive Their Retirement Preparedness Realistically?” researchers from the University of Alabama and Ohio State found that 58% of the nearly 2,300 full-time workers age 35 to 60 polled in the Federal Reserve’s Survey of Consumer Finances weren’t on a path to a secure retirement. They also concluded that just under half of those who are unprepared didn’t realize that they were falling short. No surprises there. Plenty of studies show that lots of people are woefully unprepared for retirement, while other research finds that many are overconfident about their prospects.

But the study also revealed some counterintuitive twists. For example, the researchers found that just over half of those who are actually preparing decently for retirement don’t view themselves as being on track. And among workers who weren’t prepared, those who had a traditional defined benefit pension were more likely to be unrealistic about where they stood than those who lack a pension. These sorts of surprising disconnects could be the result of people simply not knowing how to evaluate their retirement preparedness or, in the case of pensions, mistakenly thinking that the mere fact that they have a pension means they’ll have sufficient retirement income to maintain their standard of living.

Clearly, you’re better off being on track for retirement than not. But either way, it’s also important that your outlook be accurate, so you have a more realistic notion of what you must do to have a decent shot at a secure retirement. Here are three things you can do to make sure you’re being realistic about your retirement readiness.

1. Crunch the numbers—and I mean really crunch them. If you’ve been socking away money diligently in a 401(k) or other retirement plan and investing in a broadly diversified portfolio, chances are you’re making decent headway toward a secure retirement. But the only way to know for sure is to do a full-fledged assessment of your progress.

Specifically, you need go to a retirement calculator that uses Monte Carlo analysis and plug in such information as the amount you currently have saved, the percentage of salary you’re contributing to retirement accounts each year, how you’re investing your savings, when you plan to retire, and how much you expect to spend annually in retirement. Based on that information, the calculator can estimate the probability that you’re on track toward accumulating the resources necessary to generate the income you’ll need to sustain you throughout retirement. If you’re not comfortable doing this sort of exercise on your own, you should consider having a financial adviser run the numbers for you.

Check Out: Should You Bet Your Retirement On Warren Buffett?

2. Fine-tune your plan, if necessary. There’s no official standard of what constitutes “being on track.” Generally, though, if the type of analysis I recommend shows that you have less than an 80% or so chance of generating the lifetime income you’ll need once you retire, that’s a sign you need to step up your efforts. If that’s the case—and the study cited above suggests it will be for most people—you can see what steps might tilt the odds of success more in your favor.

Typically, the single best way to improve your retirement outlook is to increase the amount you contribute to a 401(k), IRA or other retirement savings plan. Contributing even an extra couple of percentage points of pay each year can fatten the size of your nest egg by 20% over the course of a career. Revising your investing strategy may also help, but be careful: Taking a more aggressive stance by loading up with more stocks may boost returns, but it also makes your portfolio more vulnerable to market setbacks. A more effective tweak: Look for ways to cut investment fees. Reducing annual costs by even a half a percentage point a year can have the same effect as saving roughly an extra 1% of pay throughout your career. Postponing retirement a few years, claiming Social Security at a later age, and downsizing or relocating can also increase your chances of retirement success.

Check Out: Drink That Latte! How To Save And Still Enjoy Life

3. Reassess your readiness periodically. Bumps and detours along the road to retirement are the rule, not the exception. Indeed, a recent TD Ameritrade survey found that two-thirds of Americans have had their retirement planning disrupted by a job loss, illness, or other problem. And even if you’re fortunate enough to sail through your career without such a setback, there’s always the possibility that a market downturn will devastate your nest egg and seriously damage your retirement outlook.

Which is why it’s crucial that every year or so you plug updated information up that retirement calculator and get a fresh evaluation of where you stand, and take corrective measures if necessary. In periods of market turmoil, you may also want to give your retirement plan a “crash test” just to be sure a severe market correction won’t irretrievably damage your retirement prospects.

Bottom line: If you want a secure retirement, you’ve got to plan for it during your career. But it’s also a good idea to have an accurate sense of whether that planning is actually panning out.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com:

Can I Create My Own Pension Annuity?
The Biggest Retirement Income Mistake Most Americans Are Making
25 Ways to Get Smarter About Money Right Now

 

MONEY 401k plans

What You Can Learn From 401(k) Millionaires in the Making

These folks are doing all the right things to reach retirement with a seven-figure nest egg.

The 401(k) has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012. In the first part of this series, we shared tips for building a $1 million retirement plan. Now meet workers on track to join the millionaires club—and get inspired by their smart moves. Once you hit your goal, learn more about making your money last and getting smart about taxes when you draw down that $1 million.
  • Greg and Jesseca Lyons, both 30

    Greg and Jesseca Lyons

    Carmel, Indiana
    Years to $1 million: 15
    Best move: Never cashed out their 401(k)s

    Though only 30, Greg and Jesseca Lyons are well on their way to reaching their retirement goals. The Lyons—he’s an operations manager for a small research company, she’s a product development engineer for a medical device maker—are on the same page when it comes to planning for the future.

    College sweethearts who have been married seven years, they made a commitment to start investing for retirement with their first jobs. They contribute 15% of their salaries. Employer matches bring that annual savings rate to about 19%. Together, they have $250,000 in their retirement accounts, invested 90% in stocks and 10% in bonds.

    Unlike many young people, they have resisted the temptation to cash out their 401(k)s when they changed jobs. Though they dialed back contributions for about six months when they were saving for a down payment, the Lyons didn’t stop putting money away. “We have stuck with the idea that retirement money is retirement money forever,” says Greg. His goal is to retire by age 60. For Jesseca, saving is about independence and financial security. “I love what I do, so I don’t see retiring early. But I don’t want to be worried or stressed out about our money either,” she says. “I am not going to sacrifice our retirement just to live a certain lifestyle now.”

  • Tajuana Hill, 46

    By starting to save for retirement at age 26, Tajuana Hill has put herselv on track to grow a seven-figure 401(k).
    Jesse Burke

    Indianapolis
    Years to $1 million: 17
    Best Move: Keeps raising her savings rate

    It’s taken Tajuana Hill, an employee trainer with Rolls-Royce, two decades to max out her 401(k), but she’s been a steady saver since her twenties. When she joined the firm at age 26, she put 10% of her pay into her plan right away. As her income rose, she ramped that up to 12%, then 17%, and finally 20% in January.

    Her reward: $224,000 in her 401(k)—all the more impressive since her employer offers no match. What has helped Hill is a side business she launched three years ago, Mimosa and a Masterpiece, an art studio where students can sip a drink during painting classes taught by local artists. The extra income let her pay off her credit cards, freeing up earnings from her day job so she could boost her 401(k) contributions.

    “When I retire, I hope to do it as a millionaire,” says Hill. If she sticks to this regimen, her 401(k) could top $1 million just as she reaches 65.

  • Steven and Melanie Thorne, both 37

    Steve and Melanie Thorne have been disciplined about hiking their retirement contributions with every raise. Melanie saves 10% of her pay in her plan, while Steve sets aside 12%. They even save extra in Roth IRAs.
    Jesse Burke

    York, Pennsylvania
    Years to $1 million: 15
    Best move: Invest in low-cost stock index funds

    Having a healthy stake in stocks is a hallmark of 401(k) millionaires. With decades to go until retirement, you can ride out market swings. That’s a philosophy Steven and Melanie Thorne have embraced. Together they have $310,000 in their workplace retirement plans, Roth IRAs, and a brokerage account, all invested 100% in stocks. “We are young, so we can be more aggressive,” says Steve, a security officer at a nuclear power plant.

    Investing is a passion for Steven, who first started saving for retirement with a Roth IRA when he was 18. He says he follows Warren Buffett’s philosophy about buying stocks: Be greedy when others are fearful, be fearful when others are greedy. But, he says, he and Melanie, a nurse, are buy-and-hold investors and keep most of their portfolio in low-cost index funds.

    Steven and Melanie have been disciplined about hiking their retirement contributions with every raise. Melanie saves 10% of her pay in her plan, while Steven sets aside 12%. They even save extra in Roth IRAs. They live below their means and direct tax refunds into retirement accounts, as well as save for college for their five year old son Chase. “We look for extra ways to save cash and keep our investment costs low,” says Steven.

  • Jonathan and Margaret Kallay, 56 and 53

    By saving more as big expenses fell away and their incomes rose, Jonathan and Margaret Kallay have been able to amass 401(k)s worth a combined $750,000.
    Jesse Burke

    Westerville, Ohio
    Years to $1 million: Four
    Best move: Power saving late

    Life can get in the way of saving for retirement, but ramping up your savings later in your career pays off. Jonathan and Margaret Kallay contributed only small amounts to their retirement plans early on. “It wasn’t much, about $50 a paycheck on a $13,000-a-year salary,” says Jonathan, a firefighter. Margaret, then an ER nurse, put away 5% of her pay.

    As big expenses fell away, the Kallays saved more. Married in 1993, the couple each paid child support for daughters from previous marriages until the girls reached 18. Once that ended and they paid off car loans, the money went toward retirement.

    Earning more has helped too. Jonathan worked extra shifts as a paramedic. Margaret got a business degree and is now a vice president at an insurance company, where she gets a generous company match. They each put about 15% in their 401(k)s, which total $750,000 and could hit $1 million in four years. They plan to quit work soon to spend more time traveling and spending time with their daughters and 5-year-old twin grandsons. “We’ve made a lot of sacrifices to invest for retirement,” says Jonathan. “It’s all been worth it.”

  • Mel and Heather Petersen, both 35

    Mel and Heather Petersen with sons Carter and Perry

    Reidsville, N.C.
    Years to $1 million: 17
    Best move: Buying rental properties to bring in more money

    Despite modest incomes in the early years of their careers, Mel and Heather Petersen have accumulated nearly $200,000 in retirement savings. Their strategy: Consistent saving. Mel, a public school teacher, says his salary has averaged about $40,000 most of his working life. Today he earns $50,000 a year. Heather, a marketing analyst who contributes 10% of her income to her 401(k), has seen a steadier increase in her earnings over the years, bringing the couple to a six-figure combined income.

    “We have always saved money for retirement no matter what our income, and never stopped no matter what financial challenges we have faced,” says Mel, dad to two boys, 8-year-old Carter and 4-year-old Perry.

    It helps that the Petersens supplement their retirement savings with income from rental properties that they began buying seven years ago. Several are paid off, and after expenses they gross about $5,000 a month in rental income. They hope to continue investing in real estate to boost their retirement savings. “We want to max out our retirement accounts down the road,” says Mel.

  • Larry and Christianne Schertel, both 58

    Larry and Christie Schertel

    Valatie, New York
    Years to $1 million: zero
    Best move: Kept faith in stocks

    Investors have enjoyed a roaring bull market for the past six years. But financial markets are cyclical. Even the most dedicated savers can panic and abandon stocks when the markets goes south.

    Despite the massive downturn during the Great Recession, Larry and Christianne Schertel didn’t budge from their 75% stock allocation. “When the market collapsed in 2008, we stayed the course and were nicely rewarded as the markets rebounded,” says Larry, an operations manager at a transportation company until his retirement this January. As they closed in on retirement, the Schertels reduced equities to about 60%. Together with Christianne, who works as an elementary school teaching assistant, the Schertels have just over $1 million in retirement accounts.

    In addition to their resolve during market fluctuations, the Schertels say automating their savings, living below their means, limiting debt, and investing in low-cost funds helped them reach the $1 million mark. “There really is no magic to it,” says Larry. “It is just being disciplined.”

MONEY Financial Planning

The Surprising Power of a One-Page Financial Plan

goal list
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When it comes to thinking about the future, sometimes less is more.

Gather round, because here is today’s personal-finance lesson inspired by famed Hollywood screenwriter William Goldman: Nobody knows anything.

In other words, no one knows where the market is headed. No one can tell you exactly what financial moves to make. And no one knows where they are going to be 40 years from now.

Here is what you can do: Make your best guess and muddle through life the best you can. That’s the thesis of The One-Page Financial Plan, the new book by New York Times columnist Carl Richards.

Rather than over thinking everything to the point of paralysis, just jot down a few general goals, get started, and don’t beat yourself up over past mistakes. Reuters sat down with Richards to talk about the surprising power of simplicity.

Q: Personal-finance experts usually don’t talk about uncertainty. Why was that important for you?

A: The giant fantasy of financial planning is that we all know exactly where we will be in 40 years, so we just need to sit down and plan for it. That gives people a false sense of precision.

The reality is that most of us don’t even know where we will be six months from now. We don’t know what our utility bills will be in the future, let alone when we are going to retire or when we are going to die. So the natural human reaction is to say, aw, just forget it. But that’s not a good choice either.

Q: So what should people do?

A: Call it what it is—guessing. Give yourself permission to let go of all this anxiety, and just make the best guess you can and be committed to the process of guessing.

Q: Your book is called The One-Page Financial Plan. So what’s on that one page?

A: On my one-page plan, there is a statement at the top of what’s important: For my wife and I, it is to spend time with the family, and to serve in the community. Then there are three goals: To fully fund all retirement accounts, to fully fund our kids’ education accounts, and to put money away for a house.

That’s it.

Q: You have had some financial missteps yourself. How did those experiences inform the book?

A: When you write publicly about this stuff, people think you have everything figured out. But nobody is foolproof, and making financial decisions is hard.

We got caught up in a very basic mistake: Projecting a rapidly growing business, which meant we could afford a big house. It turned out the business didn’t keep doing that, and we were faced with the tough situation of owing far more than the house was worth. So we lost it.

Q: What is one trick people can use to get their finances under control?

A: I use what I call the 72-hour Test. Once I found myself with a stack of unread books on my desk, and I thought: ‘What if I just waited 72 hours between when I thought I had to absolutely have a book, and when I actually purchased it?’

The surprising reality is that after 72 hours, whatever it is, you usually discover you don’t need it anymore.

Q: What about debt—how much is too much?

A: I have yet to meet anyone who has paid down debt and was unhappy about it.

Maybe on a spreadsheet it makes sense to have some mortgage debt, and invest the difference in the stock market, and make a bunch of money. But paying off your home makes people really happy.

Q: We are all so anxious about money. Why is that?

A: Money is not just about math, it’s about emotions. The stuff you dream about, the stuff that keeps you awake at night, your most cherished dreams and your biggest fears. The rubber always meets the road with dollars. That’s a very potent cocktail.

 

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