Witnessing my baby boomer parents' missteps in retirement planning, I've realized the importance of a nest egg. It wasn't always easy to see the financial burdens they encountered. However, these experiences equipped me with crucial insight into careful retirement planning.
I was curious to learn more about avoiding the mistakes my parents' generation made. So, I contacted a few financial professionals to get their insight. Their responses highlight past errors that can be a valuable guide toward a financially secure and comfortable retirement.
1. Counting Chickens Before They Hatched
Baby boomers often pin their retirement hopes on Social Security. However, relying solely on that alone carries significant risks. While a crucial piece of the puzzle, Social Security might not be enough to fully cover your expenses. This overreliance can leave boomers with limited financial flexibility, potentially leading to a challenging and stressful retirement.
As Marguerita Cheng, Founder/CFP Professional at Blue Ocean Global Wealth, puts it:
“I think the number one thing we can learn from baby boomers and those who retire before us is to develop a retirement income strategy, which includes taking a coordinated approach to pension options & social security benefits.
Social security isn’t simply a monthly check- it’s inflation-adjusted guaranteed lifetime income. The decision when to take social security depends on your personal (family too) and financial situation. One of my clients even told me, ‘Rita- 62 really isn’t old when my Dad lived to 92!'”
2. The “I'll Save Tomorrow” Mantra
Baby boomers commonly delayed their retirement savings plan with the ”I'll save tomorrow” mantra, inadvertently missing out on opportunities for additional money through employer-matched retirement contributions.
Consequently, opportunities to maximize their savings were missed, sometimes even leading to a shortfall in their retirement funds. Embracing effective retirement strategies and preparing for retirement by saving early may prevent this.
3. Not Understanding Investment Risk
Many boomers faced unexpected financial losses because they didn’t always understand the risks tied to investments, like high-return promises and life insurance policies. As a consequence, their retirement savings suffered. Seeking informed financial guidance and a clear grasp of investments is essential to prevent this.
4. Kids as a Retirement Plan
Some boomers don’t have enough invested for their retirement and are forced to rely on their children. The ability of their children to provide assistance is not something that can always be counted on, as personal finances might be tight for younger generations too. Thus, it's better to have your own backup plan, like securing multiple sources of income, investing, and discussing a sound financial plan with your financial advisor.
5. Missing the Magic of Compound Interest
Boomers often underestimated the power of compound interest, a cornerstone of retirement investments like 401k plans and mutual funds. Starting to invest early and letting earnings compound over time can dramatically increase the size of the retirement fund.
Financial advisors stress the importance of early and strategic investing for long-term gains. A systematic approach to investing can be the key to a secure and comfortable retirement without relying heavily on external support.
6. The Forbidden Fruit of Credit Cards
Like many generations, boomers are occasionally trapped in a cycle of debt through the misuse of credit cards. The oversight of the rising cost of living and a clear assessment of necessary funds versus expenditures often lead to financial strain.
Understanding interest rates, alongside ensuring timely repayments, is crucial in maintaining a healthy credit score. As a result, boomer experiences show the importance of financial literacy and discipline in safeguarding retirement savings.
7. Loyalty to One Job
Boomers often thought sticking to one job would guarantee a smooth retirement. They trust this single job to keep giving them a steady paycheck and, later on, a regular monthly income for retirement.
However, this approach must account for unexpected economic or job market shifts, which can disrupt long-term plans. By diversifying their skills and income sources, they could have created additional safety nets to protect against these uncertainties.
Ryan Furlong, CFP and Wealth Advisor at PurposePath Capital, says:
“Retirement planning is a complex process that evolves with every generation, reflecting changes in the economic landscape, societal values, and personal aspirations. When reflecting on the boomer generation, it’s important to recognize the context of their decisions.
One area where many boomers could have improved is in the diversification of their retirement savings. Many relied heavily on employer-sponsored pension plans or Social Security, not fully embracing the potential of diversified investment portfolios to mitigate risk and enhance returns over the long term.”
8. Stocks Are Too Risky
Concerns about the stock market's unpredictability made some boomers shy away from investing in stocks as part of their retirement funding. They preferred safer options without considering the potential long-term gains from stocks.
Freeman Linde, CFP and author of 3D Retirement Income, explains:
“Looking back, we see that having different types of investments, even with a few well-calculated risks like stocks, is important for a good retirement savings plan. If boomers spread their money, they would have been in a stronger spot for their future cash needs as they retired.
The boomer generation often overestimates the risk of loss in their investments and underestimates the certainty of inflation over their lifetime. They need fewer CDs, annuities, and bonds and more ownership shares in the best businesses in the world (what most people call stocks). We should all have a comprehensive equity-based retirement plan that protects against the temporary declines in the market while attacking the permanent increase in the price of everything we need and want to buy.”
9. No “Rainy Day” Fund
Boomers need guidance to separate their emergency funds and retirement savings. It's crucial to have a rainy-day fund ready for unexpected costs—this way, there's no need to dip into retirement savings when something comes up. Keeping these funds apart ensures surprises don't ruin their retirement fund. The clear separation helps them stay on course for a comfortable retirement.
10. Underestimating Health Care Costs
Underestimating future healthcare costs is a common oversight among boomers. As people live longer, comprehensive healthcare planning becomes more important to avoid unnecessary financial strain later.
Hence, allocating extra funds for medical expenses or investing in long-term care insurance is crucial. These strategies help ensure that healthcare needs don't drain retirement savings, preserving financial stability in the golden years.
Ryan Furlong, CFP, explains:
“As healthcare technology and life expectancy have advanced, so too have the associated costs, which many boomers did not fully anticipate in their planning stages. You have to plan for future costs so you don’t undershoot what you need in retirement.”
11. Real Estate Roulette
Many boomers believe in the real estate market. Unfortunately, economic fluctuations revealed that such markets are not always stable. The lesson learned was the importance of not putting all their financial eggs in the real estate basket. Diversifying investments beyond property is a crucial strategy for mitigating risk.
12. Underestimating Life’s Longevity
As lifespans extend, many boomers realize they didn’t save enough money. Preparing for a longer life is crucial to prevent running out of funds.
Now, they see the importance of increasing savings and carefully managing their money. Having enough resources for those additional years is vital to maintain comfort and avoid financial worries in retirement.
13. DIY Investing
The “do-it-yourself” approach with investments often leads boomers to miss out on potentially higher returns. Seeking professional financial advice could lead to more informed investment decisions.
Professional advisers’ experience navigating complex financial markets can lead to more strategic investment choices, potentially enhancing long-term financial security.
14. Ignoring Inflation
The failure to include inflation in their retirement calculations is a critical misstep for numerous boomers. Rising living costs steadily chip away at savings and the yields from fixed-income investments that fail to outpace inflation, leading to a shrinking purchasing power.
Neglecting to budget for recreational activities led many boomers to a financially stable retirement that lacked luster and enjoyment. They underestimated the impact of leisure and social engagement on their overall well-being, which often resulted in a less fulfilling retirement.
Boomers who overlooked setting aside funds for enjoyment missed the rich experiences and personal growth these activities could provide.
16. Estate Planning Procrastination
Many boomers wait too long to make plans for their taxable assets after they pass away, causing trouble for their families later on. Starting to plan early ensures that boomers' choices are respected and their families are looked after.
It also helps avoid family arguments and legal problems if there's no clear plan in place. Plus, it can save families money on taxes and legal fees.
17. Draining Retirement Savings
A major financial mistake boomers committed was draining their retirement savings too quickly. Instead of letting their funds grow and accumulate interest over time, many started withdrawing their savings prematurely, leaving them with significantly less money during their retirement years.
Moreover, these early withdrawals often incurred penalties, adding to their financial setback. By not strategizing the distribution of retirement funds, many boomers faced unnecessary financial pressure and struggled with insufficient funds later.
18. Not Checking the Retirement Plan
Many boomers do not change their spending habits when they retire. They kept spending like before, without considering their financial or retirement plan. Sometimes, this can lead to their savings running out too soon or even facing money problems down the road.
To ensure that you have enough money to spend throughout your life, you should consult your retirement plan monthly or quarterly. When you see that your spending aligns with your expectations, you know you’re still on track concerning your retirement spending.
19. Not Consulting With a Financial Planner
One of the errors boomers made while planning for their retirement was neglecting to enlist the help of a financial planner. Expert advice was often disregarded, making it difficult to fully grasp their financial outlook or the alternatives offered.
Misinformed decisions about investments and savings may result from this lack of professional guidance, making boomers more vulnerable to market disruptions or economic instability in their retirement years.
According to Furlong:
“Many (boomers) came from backgrounds where money was tight. This can result in an avoidance of a paid service like a financial advisor. Many boomers I come across have never worked with an advisor until they start to plan for retirement. It works for some but others would greatly benefit from starting a relationship sooner! I promise you’ll save way more in the long run than you spend.
As a CFP advising clients today, I emphasize a proactive, comprehensive approach to retirement planning. This includes:
- Diversification: Encouraging investments in a mix of asset classes to spread risk and potential for growth, rather than relying solely on traditional pension plans or Social Security.
- Healthcare Planning: Integrating healthcare costs into retirement planning from an early stage, considering options like Health Savings Accounts (HSAs) and long-term care insurance to prepare for these inevitable expenses.
- Lifelong Financial Education: Empowering clients with knowledge about financial markets, investment strategies, and the importance of staying informed about economic trends and policy changes that may affect their retirement savings.
By learning from the past and adapting our strategies, we can better prepare for a secure, fulfilling retirement.”
20. Relying on One Pension
Relying solely on a pension was risky for boomers as the pension could change their payout. Though this doesn’t happen often, pension funds can become underfunded due to mismanagement or poor investment returns.
As a result, some learned the hard way that having multiple retirement income sources is safer. Those who didn't diversify their retirement plans often struggled, leaving them vulnerable to financial instability later in life.
Brian Behl, CFP and founder of Behl Wealth Management, tells us:
“The biggest mistake or issue we see from many boomers is that they have almost 100% of their investments in tax-deferred accounts like IRAs and 401(k)s. Very few have any Roth assets or even taxable brokerage accounts outside of retirement accounts.
This causes many of them to actually be in higher tax brackets in retirement than they were while they were working. (Negating the benefits of tax-deferred investing.)
It would have been better to have a better mix of tax treatments (tax-deferred, tax-free, and taxable) compared to having almost everything tax-deferred. We see this very often and work with our clients to help them address this tax issue and minimize their lifetime tax liability.”
21. Carrying Debt Into Retirement
A common mistake observed among boomers includes retiring while still laden with debt. Lingering payments for houses, credit cards, or other loans remain, even though their income has reduced significantly.
The remaining debt can disrupt a comfortable life during retirement. Hence, it's crucial to pay off debts as a part of retirement preparation.
22. Emotional Investing
In planning for retirement, some boomers make the mistake of letting their feelings make decisions for them. For instance, they usually invest in what's trending without doing proper research.
Their approach often leads to buying high and selling low, persuaded by market volatility rather than sticking to a long-term plan. Some boomers' retirement savings may not be as solid as desired, risking their financial security later.
23. 401(K) Matching
Boomers often overlook the full potential of 401(k) matching, a critical error in retirement planning. Some would invest minimally in their 401(k), not realizing their employers would match those contributions, doubling their investment.
Under-investment left a good amount of free money on the table. In hindsight, boomers missed an easy way to enhance their savings for a comfortable retirement.
24. Spouse-As-Financial-Planner Syndrome
Many boomers relied on one spouse to handle financial planning, leaving the other in the dark. If the managing spouse became incapacitated or passed, the other struggled with financial matters.
They might not know how to access accounts or manage investments. A lack of joint financial understanding makes retirement planning challenging.
25. I'll Figure It Out Later
Waiting too long to plan for retirement puts many boomers in a tough spot. Waiting around made it clear that planning early and keeping at it is key for a good retirement.
Putting off saving and planning for retirement meant some boomers had to work longer than they wanted to. Saving and planning as soon as possible is the best advice for a worry-free retirement.
John Nowak, CFP and founder of Alo Financial Planning, explains:
“The youngest baby boomers are turning 60 this year. Many of the youngest boomers do not have a plan for their secure income throughout retirement. Therefore, they may file for Social Security with reduced benefits at age 62 instead of waiting for their full benefit at age 67 or delaying until age 70.
A retiree can create a “Social Security Bridge” where they use savings or investments for retirement income until filing for Social Security.
For example, let's say someone's Social Security benefit is expected to be $35,000 per year, and they have six years before filing for Social Security. They could allocate $210,000 ($35,000 x 6 years) to the “Bridge” and invest those funds in low-risk investments, separate from their long-term portfolio.
Not addressing the earliest years of retirement income by securing a solid income floor could lead to reduced Social Security benefits for life or a higher risk of depleting long-term savings.”