As millions of baby boomers continue to enter retirement, it's becoming apparent that many are woefully underprepared for this transition. Guest writer Mark Mazur explains why.
Baby boomers face many potential hurdles - both emotional and financial - when entering this next phase of life. Here are several common mistakes they make:
- Underestimating their needs and failing to plan. Coming to grips with how much you really need in retirement is one of the most important steps in retirement planning. Many boomers assume they will need 70 to 80 percent of their income and leave it at that. But the need to plan for unforeseen events and periodic expenses - such as home maintenance, car purchases, health care, and long-term care - is often overlooked.
- Not understanding their investment timeline. We are all living longer. According to a study by AARP, a large percentage of the 78 million Americans who are classified as baby boomers are going to live anywhere from 10 to 25 years longer than their parents did. You should assume that you will live longer than your average life expectancy.
- Not understanding the real risks. Many boomers become far too "safe" with their asset allocations. They opt for the perception of short-term safety and principal protection rather than allocating a meaningful amount to equities to offset purchasing-power risk over their entire retirement. Allocating a portion of the portfolio to meet liquidity needs is important, but having too much in cash, CDs, and bonds increases the chances that you won't keep up with inflation and your standard of living will decline in retirement.
- Relying too heavily on Social security. Given the current fiscal crisis in the U.S., we may see some reductions in entitlement programs. Timing the receipt of Social Security is a critical decision, and many that take Social Security early don't fully understand the benefits of delaying it or using other strategies to get the most "bang for your buck."
- Drawing money from the wrong sources. Baby boomers often draw money from various accounts without regard to the tax consequences. You can enhance your plan by prioritizing various "buckets" of assets according to tax efficiency, and first spending down those buckets that generate the least amount of tax liability.
These are just a few areas to consider when entering retirement. By avoiding these and other common mistakes, today's baby boomers can increase their odds of enjoying their retirement to the fullest.