We’re not going to use the so-2019 catchphrase Millennials overused to shrug their shoulders at Boomers, but it appears there are several areas where the generation with the most urgent need for making solid retirement planning decisions is falling short.
GOBankingRates recently posted an article listing several “key” mistakes Boomers are making when it comes to their 401ks, along with what they can do to correct them.
While the article notes Boomers—now ages 55 to 73—tend to have a more realistic view than younger folks of how much they should have saved for retirement and what they’ll need to contribute to get there, they’re still screwing up in many regards when it comes to their employer-sponsored retirement savings plans.
Here’s the list of those mistakes from Gabrielle Olya’s article on GOBankingRates:
Mistake No. 1: Not contributing enough
A 2019 survey of 1,000 Americans with access to company-sponsored defined contribution plans, conducted by Natixis Investment Managers, found that the average Boomer has an 8.5% contribution rate, which is high compared to younger generations. That should come as no surprise, said Dave Goodsell, executive director of the Natixis Center for Investor Insight.
“It makes sense that the older you are, the more income you would have to put toward retirement savings,” he said.
But even that comparatively high contribution rate still might not be enough for some Boomers to retire comfortably.
What Boomers should do: Whenever possible, Boomers should max out their 401k contributions and take advantage of catch-up contributions. For 2020, the 401k annual contribution limit is $19,500, but since Boomers are all over the age of 50, they can make additional catch-up contributions of up to $6,500 a year.
“There’s no hard-and-fast rule [for how much you should contribute], but you have to look at what kind of lifestyle you want to live in retirement, where you want to live, how soon you want to retire, how long you want to work,” Goodsell said. “That will all factor into how much you save.”
Mistake No. 2: Underestimating how much they will need saved to retire
The average Boomer believes they will need more than $1 million in savings to retire comfortably, according to the Natixis survey. Although the survey found that Boomers have a more realistic view of how much they’ll need compared with other generations, even $1 million might not be enough for some to retire comfortably.
“You’ve got to think about what [retirement lifestyle] you’re going to be comfortable with,” Goodsell said. “The other part is to consider how long that money has to last. Our most recent investor survey asked individuals how long they expect to live in retirement, and Baby Boomers told us that they expect to live for 23 years in retirement. That’s a long time to plan income for.”
What Boomers should do: Take time to figure out how much money you’ll actually need to retire based on the lifestyle you want and how soon you plan to retire, rather than assuming $1 million will be the magic number that works for you.
“With that $1 million you’d have some market appreciation—assuming you stay invested,” Goodsell said. “But would that be able to provide you the income and lifestyle that you’re looking for in retirement?”
Mistake No. 3: Not taking advantage of savings opportunities outside of 401k plans
Even though the ideal nest egg for the average Boomer is at least $1 million, that figure might be unattainable for many. Based on survey findings of the amount most Boomers currently have saved in their 401k plans and the ages they want to retire, the average Boomer would need to save more than $142,000 a year to meet their retirement savings goals. That kind of savings isn’t possible with a 401k alone.
If you want to retire comfortably, “you have to look outside of [your 401k plan] as well,” Goodsell said.
What Boomers should do: It’s important to take a comprehensive approach to your retirement savings planning. While your 401k might be the biggest contributor to your nest egg, it shouldn’t be your only source of retirement funds.
“Traditionally, we talk about [retirement funds] as a three-legged stool,” Goodsell said. “What are you saving in your workplace [retirement plan], what are you saving in your own taxable savings account, and what are you going to count on from Social Security? There are different income sources coming together.”
If you’re eligible, you might also consider opening a traditional or Roth IRA to add another leg to that stool.
Mistake No. 4: Not being willing to downsize or relocate
Lowering your living expenses is one way to make your 401k savings stretch further, whether it means downsizing into a more affordable home or reducing how much you spend on nonessentials. Those who don’t cut their costs could blow through their funds too quickly.
There are numerous ways Boomers can lower their living costs. Goodsell recommends asking yourself the following questions: “Do you need to downsize? Do you need to have a smaller home? Do you need to live in a different area?”
What Boomers should do: Boomers who live in expensive homes or communities should consider relocating to somewhere cheaper to get the most out of their retirement savings. In fact, many are already doing so.
“You see some of that migration happen in retirement,” Goodsell said. “People go for a lower cost of living in many cases. People I know personally have done that. They look at places where they can get a better tax break, or where property is less expensive.”
Mistake No. 5: Taking a withdrawal from their 401k plans
The Natixis survey found that 1 in 4 Boomers have already taken a withdrawal from a 401k plan, with the top reasons being to pay down debt and cover healthcare expenses. This can be a particularly expensive mistake if you withdraw money before you reach 59½ years old because you’ll face an early withdrawal penalty.
“You have to consider the magnitude of what you’re doing there,” Goodsell said. “Prior to your qualified age, [withdrawals] are subject to tax and penalties, so you could be losing as much as half of your asset value by doing that.”
What Boomers should do: Before taking a withdrawal from a 401k, Goodsell said you “should be looking at other options in the event that you need the money to really maximize what you have. That’s your long-term savings, your nest egg. So you need to make sure that you’re taking care of that. Taking money out of a 401k and incurring the penalty and tax is a significant challenge for many people.”
Alternatives to taking 401k withdrawals include getting a home equity loan, refinancing your mortgage loan, taking out a personal loan and using a 0% APR credit card. The best option for you depends on your personal financial situation.
Mistake No. 6: Not creating a budget for before and after retirement
Nearly half of Boomers (48%) believe they will be comfortable in retirement if they “watch their spending,” the survey found. But another 22% said they believe they’ll struggle financially in retirement.
Whether or not you live comfortably in retirement really comes down to budgeting. You need to figure out how much you can afford to spend each month based on what you have saved in your 401k and other retirement income streams. After that, it’s important to stick to this budget.
What Boomers should do: “The same things that work in retirement work before retirement, which is really managing your budget closely, understanding where your money is going and making decisions about what you prioritize from a financial viewpoint,” Goodsell said. “If you’re thinking about retirement, think about what you’re spending and what you’re saving.”
While it’s important to stick to a budget before retirement, it’s even more important to stick to one after you’ve retired and are reliant on a fixed amount of money.
“The pressure is really managing that budget for the long-term,” Goodsell said. “Decisions may become harder in retirement in terms of what you’re going to spend money on—your discretionary spending versus the things you have to [spend money on].”
Mistake No. 7: Having a traditional view of retirement
The survey found that 10% of Boomers believe they will never be able to retire because of financial pressures. For these Boomers, the best policy might be to shift how they define “retirement.”
“We’re starting to see that retirement isn’t for everybody—the classic, ‘go live on a golf course and not work,’” Goodsell said.
What Boomers should do: Boomers who haven’t saved up enough in their 401k plans to fund 20-plus years of not working should look at retirement as an opportunity to try new kinds of employment rather than as an end of working altogether.
“People are living longer, they’re healthier longer, they’re more able to do stuff,” Goodsell said. “People are moving into more of a second act. They’re changing the kind of employment that they have, or they’re finding ways to telecommute or things like that. They’re finding different kinds of employment in retirement that can augment income but that can also keep them active and engaged.”
Mistake No. 8: Not seeking professional advice
Boomers who seek financial advice tend to have bigger 401k balances than those who don’t. The survey found that advised participants in this age group have saved an average of $333,085, while those who have not sought out professional advice have an average of $286,671 saved.
What Boomers should do: Goodsell highly recommends that people of all age groups meet with a professional to discuss their retirement savings plans.
“This is a really complicated proposition for people [that involves] multiple sources of income, forecasting how long you’re going to need it, what percentage to take out, where to spend money,” he said. “This is why advisors are so important—the coaching that they can provide, the practical looking at options and what works best for you, and having a really focused conversation about what your personal needs are.”
Mistake No. 9: Seeking immediate gratification over saving for retirement
Some Boomers put too much focus on using their money to cover current living costs rather than maximizing their 401k contributions and retirement savings.
“We tend to be more comfortable in the immediate gratification,” Goodsell said.
He advises Boomers to ask themselves how active they are in terms of looking at long-term objectives: “The ultimate payoff is making sure you have enough in the end to live comfortably in retirement and live a good life.”
What Boomers should do: “Think through where your money goes, plan your budget and see where your cash flow goes,” Goodsell said.
Make sure part of that budget is dedicated to retirement savings and not just funding your life now.