Your retirement nest egg is critical because you spend a lifetime building it up, and you have limited options for rebuilding late in life. It’s wise to treat this money with care and be aware of risks that could cause setbacks.
Losing your retirement money is possible in several ways, especially when investment losses are involved. But in some cases, your funds are relatively safe and protected. So, if you’re getting serious about your retirement savings, let’s review some potential issues that could leave you with less money than you expect:
- Changing or leaving a job
- Employer goes bankrupt
- Taxes due on withdrawals
- Investment losses
- Common scams and fraud
Other risks may exist, and there’s nothing certain in life. But when you understand the landscape, you can reduce the chances of problems.
Changing or Leaving a Job
If your workplace retirement plan has a vesting schedule, you may lose benefits when you retire or change jobs unless you’re 100% vested. That’s because some jobs want to encourage employees to stay in their roles for a long time.
Important: Any money you choose to contribute out of your pay should be 100% immediately vested. A vesting schedule typically only applies to money your employer contributed, such as matching or profit-sharing contributions.
For example, 401(k) plans often use a six-year vesting schedule. Each “year of service” with the employer gives you additional rights to employer-funded buckets. The standard vesting schedule is:
- Year 1: 0%
- Year 2: 20%
- Year 3: 40%
- Year 4: 60%
- Year 5: 80%
- Year 6: 100%
Example: If you leave your job after three years and you have $10,000 of employer money that follows the vesting rules, you might only get $4,000 (or 40%) of that money. The remaining $6,000 stays with your employer. Again, any money you contribute as “salary deferral” contributions should be yours to keep.
Pension plans, also known as defined benefit plans, can also have vesting schedules. After working for a specific number of years, you’re able to get pension income. But if you leave your job before then, you might get a smaller payment (or no income at all).
Check with your employer’s retirement provider to learn exactly how your plan works. Every employer is different, so it’s critical to research this before making a change.
Bankrupt Employer
If your employer goes bankrupt, you probably won’t lose your retirement money, but it’s possible. Most 401(k) plans go into trusts that are kept separate from your employer’s operating funds, and that money should not be available to the employer’s creditors. If an employer goes belly-up, the plan administrator, recordkeeper, and investment providers should be able to get your money to you.
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A notable exception is non-qualified retirement plans, such as 457(f) plans. Those plans are typically only available to executives, and they may supplement other types of retirement plans. Non-qualified plans might be available to creditors, so they are less secure than 401(k) plans.
When it comes to pensions, a former employer’s bankruptcy can be a problem. However, if the plan is insured by the Pension Benefit Guaranty Corporation (PBGC), a U.S. government agency, there may be some backing available. However, the PBGC sets maximum limits on how much pension income you can receive, so you might get less money than you originally expected.
It’s important to know whether or not your pension plan is protected. Plans offered through government bodies (state, federal, or local, for example) are generally not covered by the PBGC. However, those government bodies might be able to get funds through taxes, which might help keep the pension payments going out as promised. But if the revenues aren’t sufficient to cover everything, pensions could suffer.
Investment Losses
Investment losses might be one of the biggest risks to your retirement savings. It’s possible to lose money, and it’s normal to see temporary losses when you invest in the markets. As you near retirement, the conventional wisdom is to reduce risk by investing in safer vehicles, but that’s not the perfect approach for everybody.
It’s crucial to select the right risk level and ensure that your retirement investments are aligned with your goals. For most people, a diversified mix of boring investments is a decent solution. One tool to help you understand your risk preference is to use a risk questionnaire designed by financial psychologists. But it’s also important to understand how much financial capacity you have for risk—and whether or not risk will really benefit you.
In addition to prudent investing, you can consider guaranteed products that prevent you from losing your retirement money. However, those solutions have pros and cons. In particular, they can limit your flexibility, and they may have high costs or other features that are not ideal for the majority of your retirement savings. For more information, see how annuities work for retirement.
Important: It’s almost impossible to completely eliminate risk. Even if you avoid one risk, you might take on a different risk that affects you in other ways. For example, if you choose to avoid investing in the markets, your money could lose value—or purchasing power—over the years due to inflation.
Scams and Fraud
A healthy retirement nest egg can be a target for con artists. The standard advice about avoiding anything that sounds too good to be true can help you avoid losing your retirement savings. But there are a variety of risks out there.
Elder abuse and financial exploitation are big problems, and pretty much all of us lose cognitive abilities as we age. That makes it harder to identify problems, but you don’t even need to experience cognitive decline to get scammed. Con artists are good at what they do, and they have successfully tricked smart, sophisticated people into giving up some money (I’ve heard some of the stories firsthand). Plus, with complicated relationships and family members, your retirement savings might get drained without you noticing.
Keep a close eye on your accounts, and consider enlisting a trusted contact who your investment providers can contact if they have concerns about you. That person can serve as a contact point, but they typically don’t have authority to buy, sell, or withdraw funds from your accounts. If something happens, it doesn’t mean there’s anything wrong with you.
Financial Advisor Theft
If you work with a financial advisor, it’s important to know that you can trust them. It’s also wise to monitor your accounts, even if you think you’re working with the right person. Many financial advisors can’t steal your retirement money—as long as the funds are kept separate from the advisor’s accounts. Avoid writing checks payable to your advisor or the advisor’s firm unless you’re 100% certain that there’s no risk. You can reduce the risk of Ponzi schemes and other types of fraud if you work with an advisor who holds funds at a well-known investment firm.
You can also hire financial planners who don’t manage your money. For example, fee-only financial advisors might help you plan for retirement under an hourly, flat-fee, or other type of arrangement. Then, you can manage the investments yourself—but with professional guidance.
Hackers and Online Theft
Cybersecurity is important for financial firms. So, what happens if somebody hacks your retirement account and withdraws money? In many cases, you are protected, and the investment firm holding your assets may reimburse you. However, it’s best to prevent problems, and it’s crucial to understand the specific rules for maximum protection. Unfortunately, there is no government guarantee that is specific to hacked retirement accounts, although some rules about electronic withdrawals and transfers might offer protection, depending on how events unfold.
Some of the largest retirement account providers address the problem directly. For example, I’m able to keep client accounts at Charles Schwab, and the firm offers guidance on your protection and responsibilities:
Note that protection may be limited, and sharing your password (among other things) may eliminate any protection. Again, it’s essential to understand the rules, monitor your accounts, and use best practices to reduce the chances of problems. Since those “guarantees” are from private companies, they are only as strong as the companies behind them.
Some basic security tips:
- Use a strong password, and don’t reuse passwords.
- Set up transaction alerts that can notify you of any withdrawals.
- Set up two-factor authentication, and be mindful of recovery methods in case you lose your phone or other issues interfere with your access.
- Never click on links in email or text messages unless you’re certain they’re safe.
- Call your investment provider directly using a number you find yourself (not with a number that comes in a text message or email) to verify anything suspicious.
Withdrawals and Taxes
Taxes can reduce the amount of your retirement nest egg available for spending. Technically, you don’t lose money when you have taxes due, but it can feel that way. As you plan for retirement, be sure to understand what taxes you’ll pay and how much you’ll owe. What matters most is the after-tax spending amount available to you.
