Personal Finance

3 Money Mistakes Baby Boomers Are Making Right Now

Chris MacDonald

Published: November 18, 2024 10:44 am

Any discussion around what “baby boomers” should or shouldn’t do can set off a wave of discussion, and there’s certainly differing wisdom around what potential mistakes or strategies may make most sense, given how diverse every individual household’s situation can be. Of course, few financial experts would provide blanket statements for any particular group, and I’m not going to claim that every reader will necessarily benefit from understanding these three potential pitfalls I’m going to discuss here.

That said, when reading a ton of literature on this topic, I have found some common threads around things many baby boomers regret not focusing a greater deal of energy on in their younger years. I’m going to focus on these key attributes that may provide anxiety in one’s golden years, because, well, no one wants that.

According to a report by the Insured Retirement Institute, a significant number of Baby Boomers have insufficient retirement savings and may outlive their assets. This gap between expectation and reality highlights the need for a reassessment of financial approaches, and provides the crux behind a number of the topics I’m going to discuss here.

Key Points About This Article:

• Baby boomers nearing retirement may want to re-think a few things as they transition toward their golden years.
• For those looking to have a productive and enjoyable retirement, considering these three things earlier than later can pay big dividends over time.
• Also: Take this quiz to see if you’re on track to retire

Underestimating Longevity and Healthcare Costs in Retirement

There’s some debate around whether Millennials could be the first generation in a very long time to have shorter life spans than their parents. But by all accounts, we’re living longer than we ever have, and approaching what many believe is a sort of natural cap on how long we can stay on this earth.

For humanity as a whole, that’s a great thing. We all want to live until we’re in the triple-digit category. But for many nearing retirement age, that can mean planning out a few decades. Indeed, an extended lifespan is a great thing, but it also can mean that retirement savings need to stretch further than anticipated for many.

This reality is complicated by the fact that healthcare expenses during retirement can be greatly underestimated by many households. Out-of-pocket costs can exceed $300,000 per couple over the course of retirement, not including potential long-term care expenses. Of course, there are Medicare Part B premiums, which currently average around $165 per month (and are likely to rise), as well as the cost of other supplemental insurance policies that can help fill in the gap of what Medicare covers. But as most readers are already well aware, healthcare costs have continued to trend higher at a rate that’s much faster than the underlying inflation rate. If that trend continues, it’s not good news for those who have under-budgeted over time.

There are options available to many retirees or those nearing retirement to try to build up a bigger buffer for these sorts of expenses. But having another $100,000 to $300,000 stocked away (per retiree) for these expenses alone can certainly be a good idea. One option for those who may be running out of time to save for these expenses is to consider a Health Savings Account (HSA), which is triple-tax advantaged and can be used for such expenses over time.

Taking Social Security Too Early

Many Baby Boomers choose to claim Social Security benefits at age 62, for a wide range of reasons. No one knows how long they’ll live, and for those who have health concerns or other factors to put into the equation, it can make sense in some cases to go this route.

But for the vast majority of retirees who believe they’ll live closer to the 82 mark (or longer), waiting to take distribution can be the best way to go. Monthly payments are reduced significantly by taking benefits early, as much as 30% for those who decide to start taking distributions right out of the gate. An individual who may otherwise take $1,500 in retirement at full retirement age (66) who instead chose to pull social security benefits earlier at 62 may only receive around $1,050 per month. However, if this same individual waited a bit longer (until age 70) to start taking social security, this amount would increase to $1,860 per month.

That’s quite a stark differential, and one that baby boomers ought to consider. Again, how long you expect to live really is the key factor underpinning whether waiting all the way to age 70 is the best way to go. But given that delaying benefits has other benefits as well, such as greater cost of living increases over time and higher survivor benefits for one’s spouse when one does eventually pass away, this is often the preferred piece of advice many financial planners give to their clients who are getting up there in age.

Maintaining An Overly-Conservative Investment Mix

There is such a thing as playing it “too safe.” Most retirees may certainly benefit from having some portion of their retirement portfolio invested in fixed income securities such as bonds, or in annuities which pay out consistent income for what could be the rest of their lives. However, keeping one’s allocation to other risk assets (such as stocks) too small, or eliminating all exposure to risk assets altogether, can be a rather costly move.

Those baby boomers who entered retirement a few years ago and sold all their stocks to put their capital into bonds and annuities may certainly be kicking themselves right now. That’s not to say a market crash isn’t right around the corner, and these individuals could look smart pretty soon. But given the fact that the Nasdaq has doubled over the past two years, it’s also true that staying at least partly invested generally has its perks over the very long-term. And for those nearing or entering retirement who expect to live at least another two decades, having a decent proportion of one’s investment portfolio in equities can make sense.

It’s my view that the traditional advice of allocating “100 minus your age” to stocks is often too conservative today. A more balanced approach may be needed for most investors, given how robust inflation has been of late, and the increasing costs attributed to retirement which are increasing at a faster rate.