As baby boomers move closer to retirement, many of them are making critical mistakes when it comes to their savings practices. These could create significant problems once they stop working, so it is imperative to identify any issues early on and correct them (as much as possible). Luckily, it is possible to recover from many of these mistakes, especially with the new tools that have become available.
Some of the common mistakes that baby boomers are making when it comes to retirement savings include:
1. Focusing on assets rather than income
While saving for retirement, many people naturally focus on assets. However, it is smart to switch your focus as you grow closer to retirement and pay more attention to income and spending. The whole point of saving for retirement is having enough money to live comfortably once you are retired.
Additionally, understanding the amount of money you have in a year becomes difficult when all your money is invested in the market. There are various rules for the percentage that you can withdraw without running out of money, but these ballpark figures are sensitive to overall returns and market performance.
Once you get closer to retirement, you may want to consider investments that provide a guaranteed return, such as bonds and annuities, which can provide baseline stability if the market gets volatile.
2. Underestimating their overall longevity
The parents of baby boomers often lived only until their 60s and so did not always save a great deal for retirement. However, the National Center for Health Statistics notes that the average life expectancy in the United States today is 78.6 years old. Moreover, people who are alive at 65 generally live until their mid-80s. As such, you need to be prepared to support yourself for a longer period of time than you may think.
Underestimating longevity has created a couple of significant problems for boomers. The first issue is that they do not have enough money saved to last them decades, so they end up going bankrupt.
The second issue is that they also underestimate the cost of health care. As you approach retirement, you should investigate health savings accounts (if available to you) to prepare for healthcare costs in retirement. You should also be realistic about your life expectancy; you can find a life expectancy calculator online to help you come up with a ballpark figure.
3. Failing to pay down high-interest debt
Many baby boomers have focused more on investing for retirement than paying down their high-interest debt. For decades, the overall message has focused on investing, so perhaps this is not surprising.
However, paying 20 percent interest on thousands of dollars of credit card debt while also investing is counterintuitive. The return on these investments will virtually never exceed the interest rate for credit cards.
That’s why you should think of paying off your credit card as generating its own return in the form of interest you do not need to pay. A good approach is to pay down credit card debt aggressively while still contributing to your retirement accounts to get the employer contribution match. However, maxing out your contributions is probably not the best plan when you still have high-interest debt.
4. Claiming Social Security too early
Considering today’s increased life expectancy, claiming Social Security benefits too early can create a lot of problems down the line. The amount of money you get each month directly correlates to how long you wait to claim benefits, at least until you reach the age of 70.
Since Social Security acts as a sort of pension that lasts for the remainder of your life, it makes sense to maximize the monthly payout whenever possible. Certain circumstances may force you to claim your benefits earlier, but holding out as long as possible is wisest.
For instance, claiming at 70 rather than 62 can almost double your monthly payout. The Center for Retirement Research at Boston College has a great guide online that will help you navigate the decision of when to claim. Also, talking to a professional can be helpful since there are ways to reverse the benefits claim and hold out longer in some circumstances.
5. Waiting to make a will
Too many boomers avoid estate planning and approach retirement without any sort of will. Creating a will is an easy and inexpensive way to help protect your assets. Taking the time to make a will helps ensure that the nest egg you have built for retirement is protected and disbursed in the way you want after you die.
You should ideally create a will as soon as possible with the understanding that it can be revised and updated regularly as changes occur. Willing and LegalZoom are two online resources that can provide free or low-cost will services. Of course, estate planning is a little more complicated, but a financial expert can help, as investing in this process is a critical step in ensuring the safety of your assets.