You'll face plenty of challenges and tests over your lifetime, but few are as tough as hitting your retirement number.
Hitting your retirement goal seems so easy when you're young, have plenty of time to save, and are just entering the workforce. However, life has a way of throwing curveballs at us from time to time that alter our straight and narrow view of retirement and turn it into a winding, and sometimes scary, road. Starting a family, buying a home, going to college, losing your job, or dealing with an unexpected medical expense are all monkey wrenches that life can throw in the gears of your retirement plan.
Baby boomers, look in the mirror
But life's curveballs shouldn't get all the blame for why so many baby boomers are so ill-prepared for retirement. A lack of preparation and personal miscues are significant reasons why so many baby boomers are woefully unprepared.
Pew Research Center noted in December 2010 that baby boomers would be retiring at an average rate of 10,000 per day from 2011 through 2030. Of these boomers, quite a few are expected to rely on Social Security for a good chunk of their monthly income. The Social Security Administration suggests that Social Security income should account for no more than 40% of your monthly income during retirement. But according to a recent AARP report released in September, about half (51%) of surveyed boomers are expected to rely on Social Security for 41% to 100% of their monthly household income. That's worrisome, considering that Social Security beneficiaries could be facing benefit cuts by 2034.
If there's good news here, it's that there's always time to right the ship, although each day that passes without action can reduce a person's chances of hitting their retirement number.
Three things baby boomers' retirement plans are probably missing
As I look across multiple surveys on boomers and the preparation they've put into retirement, one thing is clear: the majority of baby boomers' retirement plans appear to be missing the following three things.
1. A budget to properly fund their retirement account
For starters, some boomers seem ill-prepared when it comes to funding their retirement accounts.
According to the Retirement Saving & Spending Study released in June by T. Rowe Price, a third of baby boomers reported not sticking to a monthly budget. That may not sound like such a big deal, but no matter your age, if you aren't sticking to a budget, then it's virtually impossible to effectively save for retirement. A budget allows you to fully understand your monthly cash flow, which is essential to any saving plan.
In a more recent survey released in September by LifeCare and the Financial Planning Association (FPA), 40% of American workers said they felt unprepared for retirement due to "inadequate savings." This survey didn't break out boomers from the rest of the working population, but the data consistently shows that some boomers aren't optimizing their ability to save.
Of course, budgeting these days isn't just for pre-retirees. It's not uncommon for newly retired persons to be caught off guard by a sudden drop-off in income when they stop collecting paychecks. If you create a budget well before retirement, you'll better understand your spending habits and where you can make adjustments in order to transition smoothly to your new income level.
The solution to these problems is easier than ever. Formulating a budget should only take about 15 to 30 minutes each month, and nearly all of the calculations can be done online or through the use of budgeting software, which practically eliminates all the headaches normally associated with creating a budget. Best of all, you can adjust your budget as you see fit, as you're ultimately in charge of your own retirement.
2. A defined withdrawal plan
Six months ago we took a look at some of the basic things that every financial retirement plan should have. One study that really stood out was from Pentegra Retirement Services, which surveyed more than 1,500 people to establish their retirement readiness. The study showed that 56% of surveyed workers -- again, this didn't specifically break out boomers from the rest of the respondents -- didn't have distribution plans in place to access their money once they retired.
Meanwhile, a Forbes survey that questioned more than 1,300 baby boomers this past summer showed that only 59% of boomers had withdrawal plans for their savings.
Why is this such a big deal, you wonder? Not having a draw-down plan for your nest egg could leave you at risk of burning through your retirement money quicker than you had expected. Another issue is taxes. If you haven't fully thought through your disbursement options, or even decided where to retire, then taxes could take more of your hard-earned income than expected.
As with budgeting, the solution isn't all that demanding, but it may take a bit more than 15 to 30 minutes at first. Before retiring, you need to understand the tax implications of the state you're retiring in (e.g., does it tax Social Security benefits, and how high are property taxes?), and you should have a firm grasp of what sort of tax responsibility you might face for making a withdrawal from your retirement account(s). For example, a qualified withdrawal from a Roth IRA is completely free of taxation, whereas a traditional IRA requires accountholders to make a minimum withdrawal by age 70-1/2, and you will be required to pay taxes on your withdrawal. Retirement is not the time to let taxes catch you by surprise, so take the time to educate yourself well in advance.
3. A second look
Lastly, most baby boomer retirement plans are lacking a second look from family, friends, or a financial advisor.
According to a survey conducted by the Transamerica Center for Retirement Studies in December, fewer than 10% of current retirees admitted to receiving financial assistance from an employer when transitioning into retirement. This includes just 9% who affirmed they'd received some financial counseling.
Based on findings from the aforementioned LifeCare and FPA study, just a fifth of the 45% of respondents who did have financial plans were working with a financial planner. The irony? More than four in five (83%) people surveyed suggested that working with a financial advisor would be beneficial. (The survey does note that misconceptions about advisors prevented many of those surveyed from working with one.)
I've devoted my life to finance and the pursuit of financial education, but I'm not ashamed to admit that I'm constantly learning new things all the time. There's no shame in admitting that a second, third, or even fourth pair of eyes looking at your financial situation could help you. I certainly don't have all the answers when it comes to estate planning or every single facet of tax planning. This is where an advisor, a family member, or a financially savvy friend can come in handy so you can catch what you might have overlooked.
Eager to get started with that second look? The Motley Fool's retirement landing page could be the perfect place to start.
Remember: You, and only you, are responsible for meeting your retirement number. The longer you wait to take action, the less likely you are to retire comfortably and on your own terms. Make today the day that you take charge and get your retirement back on track if one or more of the above aspects is missing from your retirement plan.