Mia Taylor* says many baby boomers are facing the reality of living much longer than they expected when they started planning their retirement, but there are lessons for the rest of us in their mistakes.
Photo: Clem Onojeghuo
As a generation that famously came of age amid postwar prosperity, baby boomers experienced a level of wealth and opportunity largely unheard of by their parents or grandparents.
All of that wealth, however, has not necessarily translated into being financially prepared for retirement.
According to research from Legg Mason, the average baby boomer has saved less than half of the amount they think they’ll need to comfortably transition out of the workforce.
It’s a reality that’s left many boomers worried about making ends meet during retirement and contemplating the reality of working much longer than expected.
But financial professionals say younger generations can learn from the mistakes of boomers.
In other words, pay close attention to where they went wrong and don’t fall into the same traps yourself.
So, what are the biggest financial missteps made by baby boomers?
Here are some of the top answers from experts.
Mistake no. 1: Buying too much real estate
Overextending and buying a large home is a losing strategy when it comes to laying the groundwork for retirement, says Robert Johnson, principal at the Fed Policy Investment Research Group.
“Larger homes have greater initial costs and greater ongoing costs, including maintenance and property taxes, when compared to smaller, starter homes,” Johnson said.
“Many people would be much better off by renting or buying a smaller home and investing the savings in financial assets for the long run.”
Viewing your home as a vehicle to prepare you for retirement, at the expense of adequately channelling savings into other more liquid wealth accounts, can have lasting consequences, says Drew Kellerman, founder of Phase 2 Wealth Advisors.
“Don’t misunderstand: paying down a home loan and eventually being debt-free is an excellent plan,” Kellerman explained.
“That said, counting on your home equity for your future living expenses can be highly problematic.”
Home equity can be accessed in one of three ways — selling the home, taking out a line of credit, or obtaining a reverse mortgage.
“What do all three options have in common?” Kellerman asked.
“They all assume that housing prices will forever continue to rise — or at least not crash — just before you need to get at that equity.”
“This means you’re treating your home as a retirement asset, or investment.”
“If so, and all your savings are tied up in your equity, this’s a disturbing lack of diversification.”
By all means, obtain the lowest interest rate mortgage you can and pay it down quickly, but not at the expense of building other, well diversified retirement assets.
Mistake no. 2: Investing too conservatively
When it comes to building wealth, one can either sleep well or eat well, says Johnson.
Investing conservatively allows one to sleep well, as there isn’t much volatility in that approach.
But, it doesn’t allow you to eat well in the long run because your account typically won’t grow much.
The surest way to build wealth over the long run is to invest in stocks, Johnson said, but too many people invest very conservatively and miss out on that opportunity.
“If you have a long time horizon, you should invest in a diversified portfolio of common stocks.”
Mistake no. 3: Underestimating how long they will live
The parents of many boomers may have only lived until their fifties or sixties, and as a result, boomers figured they wouldn’t live much longer than that themselves, says Misty Lynch, a certified financial planner with John Hancock Advice.
“That may have kept them from saving a lot for retirement because they didn’t think it would be necessary,” said Lynch.
As we all know, times have changed and life expectancy is much longer thanks to improvements in health care.
Underestimating their own longevity has resulted in at least two problems for boomers: many don’t have enough cash socked away to cover two or three decades of retirement, and they’re not prepared for the health care costs they’ll face during that lengthy stretch.
“Young professionals should be aware of health care costs and take advantage of things like Health Savings Accounts if they’re offered through their health insurance,” added Lynch.
“If you’re young and don’t have a lot of medical expenses, these accounts can grow and be used tax-free to cover those costs when you retire.”
Mistake no. 4: Over-investing while carrying high-interest debt
It’s not unusual for baby boomer clients, or clients of any age, to come into Kellerman’s office talking about their $15,000 credit card balances — on which they’re paying 21 per cent interest while simultaneously trying to save for retirement.
“Carrying high-interest consumer debt is, unfortunately, quite common today,” said Kellerman.
“What is utterly bewildering, though, is when we hear it from a boomer who’s also maxing out their [superannuation] contributions.”
“In other words, they are aggressively saving while carrying high-interest debt.”
If the plan is to pay that credit card debt down aggressively within one year, while also still contributing to a super program to get the matching employer contribution, Kellerman says that may be a good approach.
Moral of the story?
Get your credit card debt under control before making excessive super contributions, otherwise you’re not really gaining any financial ground.
Mistake no. 5: Starting too late
The one thing nobody can get back is lost time, says Matt Reiner, CEO and finance app Wela.
“Many baby boomers started saving for retirement too late and expect to live the same lifestyle,” says Reiner.
If you wait until your late fifties to start investing in your retirement plan, no financial advisor or technology solution will be able to miraculously make you the money you need to retire by 65, says Reiner.
Younger generations should begin by automating their savings, he advises.
Even if you start small, the most important part is to simply get started.
* Mia Taylor is a contributor for The Simple Dollar.
This article first appeared at www.thesimpledollar.com.
