According to the Pew Research Center, roughly 10,000 Americans will celebrate their 65th birthday every day for the next 19 years. The first Baby Boomers – born between 1946 and 1964 – are moving from the workforce into retirement. There is a large amount of research done related to this change in demographics and the overall effects it will have on our country. On an individual level, we know that a successful retirement takes some thought and retirement planning.
Unfortunately, far too many in the Baby Boomer Generation are winging it. Before retirement, many will move through their working years not giving the golden years much thought. These Boomers may be saving, but without a thought about what life will look like after the work to retirement transition, or what is needed to attain the preferred lifestyle. Then, once retired, the day-by-day living continues without knowing if the lifestyle is truly sustainable.
As a Boomer, you want to make sure you avoid these common retirement planning mistakes:
Not Saving Enough for Retirement
There is a Savings Crisis happening in America today. According to the U.S. Census Bureau, the average length of retirement is 18 years, the average 50-year-old has $43,797 in savings, 36% have not saved anything for retirement, and just 4% of Americans have adequate retirement savings. It should not come as much of a surprise that 35% of Americans 65 or older rely solely on Social Security. Unfortunately, many Boomers in their peak earning years use the extra income for spending, not savings.
Withdrawing Funds Early from Retirement Plans
Your 401(k), Pension, IRA, and ROTH IRA are designed to help you save for retirement in tax advantaged, segregated accounts. Using these funds prior to retirement can be very destructive. Withdrawing funds from these employee funded accounts will potentially result in incurring extra taxes and penalties, as well as lost benefits.To see what the true cost of an early withdrawal, Wells Fargo has a cost calculator available here.
Not Planning for Retirement Specific Expenses
Life after working is different than it is during the working years. With an additional 40+ hours each week, Boomers are free to spend more time golfing, traveling, dining out, and playing with the grandchildren. These extra activities, combined with the growing costs associated with health care, can be substantial.
The average American is living longer than ever. According to the Center For Disease Control (CDC), the average 60 year old male is expected to live an additional 21.6 years while the average 60-year-old woman another 24.5 years. Of course, each individual has a different set of health issues that affect how long we ultimately live; understanding how long you are likely to live is an important factor to consider.
Taking Social Security Early
Taking your Social Security benefits before your full retirement age could reduce your benefit by as much as 30%. For some people this is the right decision to make, but not always. In our experience, the decision to take a reduced benefit happens for two reasons.
Some people, as we just discussed, underestimate how long they are likely to live and want to get all the benefit they can as soon as they can. There is however, a general feeling that the Federal Government will be shutting down shop and the checks will stop coming. This is simply not true. Truth is, if there are no changes to the system as it stands, those in Gen X and Gen Y are likely to see a reduced benefit due to a lack of funds available. There are a number of options being considered to fix the problem according to the Social Security Administration, none of which would have an effect on the Baby Boomer generation. For Boomers, you can be assured that the funds will be there to pay your benefits whether you start at age 62 or age 70.
Failure to Hedge Against Inflation
Loss of purchasing power is the silent lifestyle killer. Many retirees are not comfortable with market volatility, preferring investments that are more stable in principle like fixed-rate CDs, U.S. Treasury Bonds, and savings accounts. With today’s low-interest rate environment, saving only in such entities is a sure fire way to erode spending power. A proper asset allocation will produce a rate of return at or above the rate of inflation.
Many people have been leaving the workforce in their late-50s and early 60s – some by circumstances, others by choice. Leaving the workforce early changes the retirement picture in a number of ways. The younger you leave the workforce the more years you have to live off of savings; You lose years of saving and turn them into spending; If savings is inadequate you may have to start taking social security benefits early.
It’s not too late to start planning, even if you are currently retired. Any good retirement plan will have a good idea of what retirement will look like and the amount of financial resources necessary to attain the desired lifestyle. Using the Envision® Process you can assess your current situation. Through this process, you will see where you stand financially and have the information necessary to make informed life decisions.
For more information, Magellan Financial, Inc. can be contacted at 610-437-5650 or via email.
Envision ® is a registered service mark of Wells Fargo & Company and used under license.