Baby boomers are approaching retirement, and many are already retired and enjoying their golden years. But for middle-class boomers, there are some costly mistakes that can quickly turn a dream retirement into a nightmare.
According to the Transamerica Retirement Research Center, the median estimated retirement savings for baby boomers is just $202,000. So for middle-class boomers, there isn't much margin for error.
Check it out: 8 reasons baby boomers end up poor in retirement
More information: One smart way to increase your retirement savings in 2024
GOBankingRates interviewed Raman Singh, CFP and owner of Singh Private Wealth Management, about common financial mistakes and how middle-class baby boomers are making them as they enter retirement. We've got inside information on how you can avoid it.
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Individual stock holdings
Singh said one of the biggest investing mistakes baby boomers can make is “holding concentrated stock positions without understanding the potential downside.” “Market volatility can lead to large swings, so diversification is key.”
While investing in the next Amazon, Apple, or Tesla may sound appealing, holding a large portion of your retirement savings in individual stocks can be risky. If one of your large holdings drops significantly in value, it can negatively impact your long-term retirement plans.
Instead, Singh recommends focusing on diversifying your stock holdings. This may mean choosing index funds rather than individual stocks. As you near retirement, diversifying into assets outside of the stock market can reduce risk and reduce portfolio volatility.
Find out: 3 ways upper-middle class retirees stay wealthy in retirement
spend too much money
One of the biggest problems when approaching retirement is “overspending and not living within your means,” Singh said. “It's important to match your income with your living expenses. Overspending can force you to draw from your savings, depleting them faster.”
An easy way to avoid this mistake is to create a simple budget by listing your income and expenses on paper. This will give you a guide to how you spend your money and help you make sound financial decisions throughout the month.
Many retirees have essentially a fixed income and draw on assets from retirement savings, pensions, or other sources of income. If you don't have a budget in place and you overspend, you can exceed the withdrawal rate supported by your retirement nest egg and use up your retirement savings faster than expected.
Accumulating high interest debt
Singh said one of the biggest mistakes baby boomers make when it comes to financial planning is accumulating too much credit card and high-interest debt.
“These debts can be a financial burden in retirement, especially with high interest rates on personal lines of credit and credit card balances,” he said.
As people over the age of 60 look to quit their jobs, they can accumulate high-interest debt, which can result in high monthly minimum payments and hundreds of yen in interest. To avoid this, creating a plan to eliminate consumer debt in retirement can reduce your monthly expenses and give retirees more space in their budget.
Taking it a step further, aiming to pay off your mortgage can significantly reduce your monthly expenses leading up to retirement, making it easier to start living off your retirement savings.
Use only 401(k)
A big mistake soon-to-be retirees make is relying on pre-tax 401(k) savings instead of using Roth accounts or tax-advantaged general accounts, Singh said. “Relying solely on pre-tax savings means you'll be taxed on every withdrawal. A balanced tax bucket can alleviate this problem.”
401(k)s are the most popular retirement accounts available, but they're not the only place you can save for retirement. Opening a Roth IRA or saving funds in another tax-advantaged account (such as a health savings account) can reduce your tax burden in retirement. Using only a 401(k) gives retirees a lot more control over their taxes in retirement.
Applying for Social Security too early (or too late)
Social Security is designed to supplement your retirement income, but many people don't know when to start claiming this benefit.
“Filing too early can lead to long-term loss of benefits, and filing too late can deplete retirement savings,” Singh said. “Understanding your income needs and desires is critical to properly timing your Social Security benefits.”
You can check your potential Social Security benefits by creating an account and checking your earnings history at SSA.gov. This shows the potential monthly income if he claims at age 62 (early), age 67 (full retirement age), and even age 70 (maximum benefit).
However, working with a certified financial advisor who specializes in retirement planning and Social Security can help you make the most of this benefit based on your retirement needs, tax situation, and income. Therefore, it may be worth hiring a paid financial advisor to help you choose when to apply for Social Security benefits.
Lack of long-term care planning
Medical costs can ruin your retirement, especially if you don't have the right insurance. The lack of a long-term care plan is especially harmful to couples, Singh said. “The absence of such a plan can lead to significant financial burdens, potentially leaving individuals bankrupt during the critical years of retirement.”
As you near retirement, it's a good idea to start looking into long-term care insurance plans. It should be part of your overall financial plan. Working with a licensed financial advisor can help you understand what the right insurance is, but be prepared for potentially high premiums.
No help from an advisor
When considering retirement, there are many moving parts to your financial plan. From investing to insurance to tax planning to estate planning, it can be overwhelming for even the most financially savvy individuals.
Singh said one of the mistakes middle-class baby boomers make when preparing for retirement is not seeking advice from a certified financial planner. “With her flat-fee CFP, you can effectively avoid these pitfalls.”
You may feel nervous about managing your retirement investments on your own, but talking to a financial planner can help you learn about withdrawal processing, tax planning, insurance options, and create a realistic budget for your retirement. will help you create a comprehensive plan. This is a valuable resource that will help you avoid most of the mistakes listed above.
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This article originally appeared on GOBankingRates.com: I'm a Financial Advisor: The 7 Most Costly Mistakes Middle-Class Boomers Make
