As baby boomers near retirement, they’re discovering the pitfall that previous retirees have been complaining about for years – insufficient retirement preparation.
Although a wealth of information is available on the subject of retirement planning when the time is near, little has been written about the fundamental importance of planning for retirement early in life. Errors made in the years approaching retirement can haunt a person for life as the stakes are often very high. A retiree can easily end up with less money, or less retirement, than planned. Or can face big tax bills that could have been avoided had he or she been better prepared. Here are some of the most common mistakes made in retirement planning and how to avoid them.
Underestimating Life Expectancy
Financial planners used to routinely create retirement plans that stopped at age 85, because the chances seemed pretty good that clients would be dead by then. The average life expectancy at age 65 is 10.3 years for men, 12.4 years for women. But averages don’t always tell the truth. You may be in better health than the average person, take better care of yourself or have better DNA.
Another topic among baby boomers is the cost of long-term care facilities. Surveys have shown that one out of two people will require some extended stay in a long-term care facility. With the cost of a long-term care averaging $64,000 per year as an average across the United States, that would make a significant dent in a baby boomer’s retirement nest egg.
The longer a person lives, the more he or she will benefit from delaying the start of Social Security pay. Although one can start receiving checks as early as age 62, the amount of the checks increase the longer one waits, up until age 70.
Assuming You’ll Be Able to Work As Long As You Want
Baby boomers are famous for proclaiming that they’ll work past retirement age. A recent AARP study found 79 percent of potential retirees predicted they would continue working at least part of the time during their retirement years. How they’ll actually feel once they’re in their 60s and 70s, though, is an open question. Right now, the typical retirement age is 62, according to the Employee Benefit Research Institute, and 40 percent of retirees say they left the workplace earlier than they’d planned, often because of illness, disability or layoffs. In fact, 42 percent of women over the age 65 and 38 percent of men in the same age group have disabilities, according to the U.S. Census Bureau. Only 12 percent of people over the age 65 are still in the workforce. Many people find that even without chronic health problems, their energy begins declining in their late 60s and 70s, although a few are able to work into their 80s or even 90s.
Locking in Poor Returns
Retirees do this in a number of ways, but the two most common are certificates of deposit (CDs) and immediate annuities. CDs typically offer interest rates not much higher than the rate of inflation. Once taxes are calculated, the CD often loses its purchasing power. While CDs can be a part of an investment strategy in retirement, most retirees will need the long-term growth potential offered by stocks. The proportion of a portfolio that should be in stocks depends on age, risk tolerance and growth needs.