The oldest baby boomers have already made their transition into retirement, and the youngest are on their way. They now face the prospect of some well-deserved R&R after several decades in the workforce -- but poor financial planning could derail that for some.
Baby boomers are on track to live longer than any generation before them, which means their dollars will have to stretch much further in retirement. But those who fail to plan for this may find their financial security in jeopardy at the time when they need it the most. Here are a few of the most common money mistakes baby boomers are making, along with some suggestions on how to fix them.
Underestimating how much money they need to save for retirement
In the past, Americans' retirement savings only had to see them through the last 10 years or so of their lives. But the average life expectancy of today's 65-year-olds is 84 for men and 86 for women. That means your savings may need to last 20 years or more. This can put a strain on your finances, and it will only get worse if you end up with a serious illness that requires long-term care.
It's important to think realistically about how much money you'll need in retirement, preferably before you get there. First, figure out how much money you'll need to live on each year. Then factor in the expected inflation rates and how long you expect to live. Of course, you won't be able to predict this for sure, but most experts recommend assuming a 3% inflation rate per year. That means that if your living expenses come to about $40,000 this year, next year they may cost $41,200 due to inflation (that's $40,000 plus 3% of $40,000). And the year after that, they may cost $42,400. Using an inflation calculator such as this one, you can plug in your current expenses, the year you plan to retire, and the anticipated inflation rate. The calculator will show you what your expenses may be in the future.
Now that you've estimated your annual retirement income need, you can figure out how much money your independent savings will have to provide each year. Just subtract the income you'll receive from other sources -- Social Security, pensions, annuities, and anything other than your own nest egg -- from the amount of income you'll need each year. The resulting amount will need to come from your own accounts.
If it doesn't look as if your savings are on track to provide that income every year for a couple of decades or more, then you may need to save and invest more aggressively. Fortunately, savers over age 50 are allowed to contribute up to $6,500 per year to IRAs and $24,500 to 401(k)s to help them catch up on their retirement savings. (The contribution limits for savers under age 50 are $5,500 and $18,500, respectively.)
If you're concerned that you may need long-term care at some point, consider adding long-term care insurance to your retirement plan to help cover these costs.
Overestimating Social Security payments
A third of baby boomers expect Social Security to become their primary source of income in retirement, according to a Transamerica study. But what most don't realize is that Social Security was only ever meant to be supplementary. In fact, for most people, it only covers about 40% of pre-retirement income. If you haven't been saving enough for retirement on your own, you could find yourself facing some lean times ahead. But you can avoid this problem by calculating how big you can reasonably expect your Social Security payments to be.
Your Social Security benefits are calculated based on your average inflation-adjusted monthly income during the 35 highest-earning years of your life. There are several calculators that can help you figure out how much you can expect. But if you want the most accurate estimates, create a my Social Security account on the Social Security Administration website.
Your monthly Social Security amount will also depend on when you begin taking benefits. The Social Security Administration designates your full retirement age based on the year you were born, and at that age, you're entitled to receive 100% of the retirement benefit you've been promised.
For baby boomers, full retirement age will be somewhere between ages 66 and 67. You can begin drawing upon your Social Security benefits at age 62, but you'll receive 25% less per check if your full retirement age is 66 for starting this early. If your full retirement age is 67, you'll receive 30% less per check. For every month that you delay taking Social Security, the amount you'll receive per check will grow until you begin receiving 100% of your benefit at your full retirement age.
But you don't have to stop there. You can continue delaying benefits past your full retirement age, and your checks will continue to grow, all the way up until you reach the maximum benefit amount at age 70. This will be 124% of your designated benefit amount if your full retirement age is 67 and 132% if your full retirement age is 66.
Social Security alone won't cover your expenses, so it's important to make sure you have other retirement savings to supplement your retirement benefits.
Failing to diversify investments
More than half of baby boomers have 70% or more of their investments in stocks, according to financial technology company FeeX. This is a risky strategy, because if the stock market enters another decline, the value of these investments could plummet, leaving you without money when you need it most.
Investing in stocks is a great way to grow your nest egg, but it's important to diversify so that if one of your investments takes a hit, you don't lose everything -- especially when you retire and start relying on your portfolio for regular income. Most financial planners recommend that baby boomers limit stocks to a maximum of 60% of their portfolio and fill the rest with bonds, money market funds, and other low-risk investments.
Regardless of what you invest in, it's important to take the time to learn about sound investment strategies and how to choose the best investment products for your risk profile. Those who are not confident or not interested in doing this should consider asking for help from a more informed family member or a financial advisor.
For baby boomers, thorough financial planning can mean the difference between a relaxing retirement and a stressful one. Take the time to determine how much you need to see you through the rest of your life and make adjustments as necessary. And don't be afraid to ask for help if there's something you're unsure about. Now isn't the time to take unnecessary risks.