It is widely known that the baby boomer generation grew up during a time of postwar prosperity, and that, as such, they encountered a certain degree of fortune and opportunity that was, for the most part, entirely unknown and unheard of (definitely by their grandparents and certainly by their parents). All of this money, despite making things quite pleasant for them, surprisingly did not do anything for the baby boomers in terms of their financial preparedness for retirement. According to research from Legg Mason, an American investment management firm, “the average baby boomer has saved less than half of the $658,000 that the firm believes boomers will need to comfortably transition out of the workforce.”
Out of the 900 investors that made up this survey, the average amount of money that was found in employer-sponsored retirement accounts was $263,000 while the older boomers, those 65 to 74, had an average of $300,000. Not good y’all!! So, here is what we, as the up-and-coming rulers of the universe, can do in order to avoid the fate of the financially unprepared boomers. Pay very close attention to where things went wrong and be extra careful not to make the same goof-ups ourselves.
Massive real-estate overconfidence
Baby boomers went crazy with the whole real estate game. And when I say crazy, I mean … well … I mean crazy. I chose my word pretty deliberately. For instance, buying too large a home. Don’t do it! BBs did it! Don’t fall for the same racket they did. Take it from Robert Johnson, principal at the Fed Policy Investment Research Group and former president and CEO of the American College of Financial Services in his interview with The Simple Dollar:
“Larger homes have greater initial costs and greater ongoing costs, including maintenance and property taxes, when compared to smaller, starter homes,” explained Johnson. “Many younger people, or older people for that matter, would be much better off by renting or buying a smaller home and investing the savings in financial assets for the long run.”
And here is another myth
Real estate is not a surefire investment. In other words, it will not always continue to rise in value at a constant rate for an indefinite period of time. This was another sort of fallacy that the good folks born out of the 1950s believed in quite ardently. “Viewing your home as a vehicle to prepare you for retirement, at the expense of adequately channeling savings into other, more liquid wealth accounts, can have lasting consequences,” said Drew Kellerman, founder of Phase 2 Wealth Advisors in Gig Harbor, WA in the same interview with The Simple Dollar.
“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? 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,” Kellerman noted. “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.”
Hyper-conservatism in investing
It turns out that playing it too safe — or at least too too safe — when it comes to investment strategy might not be the way to go. Let me rephrase that: Being too conservative with your investment strategy is definitely not the way to go. One can either sleep well or eat well when it comes to building wealth. But what this means is that sleeping well gives you virtually zero growth potential. And although the market is volatile, you can’t win it — and eat well — unless you give it a go or two.
“Since 1926, according to data compiled by Ibbotson Associates, the average annual return for large capitalization common stocks is 10 percent. Government and corporate bonds return around 6 percent, while cash is in the neighborhood of 3 percent,” Johnson explained. According to him, the best investment is usually in stocks, but too many people invest too conservatively and thereby miss out on this opportunity. “If you have a long time horizon, you should invest in a diversified portfolio of common stocks.”
High-investment plus high-interest debt
Baby boomersss! Nooo! Sorry. What I meant to say was that this is something that many, many (many) baby boomers are guilty of doing. Namely, trying to aggressively save for their retirement. Of course, this aspiration is all well and good and makes firm human logical sense, but not when you are doing it while you have in your possession something like a 25 percent interest rate on your credit card balance. It’s a very, very common misstep to try and contribute toward one’s retirement while also being gridlocked by one’s debt.
“What is utterly bewildering, though, is when we hear from a boomer who’s carrying high-interest consumer debt and also is maxing out their IRA and 401(k) contributions,” said Kellerman. “In other words, they are aggressively saving while carrying high-interest debt.” Unless your plan is to aggressively pay the credit card debt down within one year all-the-while contributing to your 401(k) program, then it is a very perilous and dangerous road that you will be walking.
“The times I shake my head is when people are making minimum payments on their credit card debt and then maxing out a 401(k) or contributing over and above the employer match,” continued Kellerman. “There is no leverage to that additional contribution to the 401(k). Yes, there’s compounding interest, but at the same time you’re putting an extra $50 in your 401(k), you’re paying $75 in credit card interest each month.”
Moral of the story: Is your debt completely out of control? Yes? Then that means you shouldn’t be trying to figure out your retirement right just this moment. Work aggressively on your debt and then, and only then, work out all that retirement stuff. But first the debt and second the retirement.
A late start on saving
Your retirement is no joke. So get to getting it right this very (very) second (and no I don’t have a stutter. This is just so important that it merits a certain level of frenzy). The one thing nobody can get back is lost time, said Matt Reiner, CEO and co-founder of the finance app Wela and author of “Ready to be Rich: Smart Financial Advice for People on the Way Up.”
“Many baby boomers started saving for retirement too late and expect to live the same lifestyle,” Reiner told The Simple Dollar. “If you wait until your late 50s 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.”
Takeaway
So, here it all comes together. Don’t be fooled by the faux-safety of the real estate game. It is not all peaches and raspberries and ice cream (I just cannot remember how that saying goes). Don’t be afraid to make a few investments here and there because, as the old saying goes, you can sleep well or you can eat well. But hey, if you aren’t eating well then chances are you probably won’t be sleeping too well anyway, right? So don’t worry an obsessive amount about the market volatility. Because you will definitely miss 100 percent of the shots that you don’t take.
Continuing along, don’t even try to tackle your retirement concerns until you have tackled your debt concerns. And remember that it is never too early to start working on a retirement plan. And last, but not least: This may sound a bit macabre, but don’t underestimate just how long you are going to live.
It’s the modern world, everybody! C’mon! Seriously though, many baby boomers made just that error: They underestimated their longevity, didn’t save because they didn’t think that it would be necessary to do so, and because of this misstep, it became a disaster for them when they came to the conclusion that they had a lot more life to live than they originally anticipated. Check it: The average life expectancy in the United States is about 78.6 years old, according to data from the National Center for Health Statistics. And if you manage to make it to 65, you’re likely to live into your mid-80s on average.
So let’s avoid the aforementioned and time-trodden bundle of errors and, in doing so, we’ll all have a nice grand ole’ retirement party in, oh, around, let’s call it, 40 or so years. See y’all then.
Hooray!!!
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