The majority of baby boomers are woefully unprepared for retirement. In large part, this is because baby boomers made too many critical financial mistakes. Here are some key ways boomers have failed at retirement planning and how you can avoid these errors in your own retirement preparations:
Assuming what went up, will continue to go up. Many boomers bought homes or upsized to McMansions during the good years, often using highly leveraged, high risk, and unconventional loans. They assumed that this was a low risk activity because of the equity they hoped would accrue from continued real estate appreciation. They were wrong to assume this. The era of continuously increasing real asset values, equity markets, and bond yields is over, perhaps for years or decades. Boomers didn't figure this out in time.
Using dubious home equity as a primary retirement nest egg. For boomers who planned on using home equity as a retirement plan, their nest egg is now a cracked or empty shell. Homes are not investments. When they are paid for, homes deliver tax-free shelter services.
Failure to diversify. Some boomers didn’t establish a proper allocation of investments into non-correlated asset classes. This takes careful study and thought. Instead, many boomers were oblivious to risk or focused on chasing returns from the hottest funds.
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Ignoring life expectancy. When we plan for retirement, we often forget how long we might live. Millions of boomers abruptly pulled money out of the markets in response to negative conditions. They sold low, forgetting that their investment horizon still spanned 20 or 30 years. Stable value funds and CD's are unlikely to sustain them until the end.
Sacrificing retirement saving for your children. Boomer parents have been known to borrow against their homes and retirement accounts to pay college tuition or even to send adult children financial support. This is a bad idea. If you can afford to help your adult kids, you may want to do so. But don't take on debt to help your adult children unless your retirement plan involves moving in with your kids when you are old and broke.
Becoming addicted to stuff. Boomers are now turning 65. Many of us now want to simplify our lives. We will be discarding a lot of the stuff we wasted money on over the years. The better path is to figure out that a lot of that stuff is more trouble than it's worth before you buy it.
Working for the money. Yes, we need money and work is where we get it. But boomers have done a poor job with work-life balance. If you concentrate more on controlling your spending, you will have more flexibility and choices on managing your income. Once you become accustomed to car payments and other debt-driven consumption, you risk getting stuck in a work life of waiting for weekends and vacations that come and go but never quite satisfy.
The baby boomer generation has done an excellent job of teaching others retirement planning lessons using the “don’t do what I did” technique. Younger retirement savers would be wise to learn from the mistakes the baby boomers made.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.