Failing at Retirement: 11 Mistakes Baby Boomers Are Making

Failed test

Most baby boomers failed a quiz on retirement concepts. | iStock.com/Tupungato

Boomers, you get an F. Roughly three out of four people between the ages of 60 and 75 could not pass a quiz on basic retirement income concepts. That’s the conclusion of the 2017 Retirement Income Literacy Survey by the American College of Financial Services.

Older Americans bungled questions on topics, including Social Security, investing, and long-term care, the survey found. Fewer than 1% aced the quiz, results that David Littell, the retirement income program co-director at The American College described as “alarming.”

The news wasn’t all bad. Many people understood inflation, had a good grasp of the ins and outs of Medicare, knew about required minimum distributions from IRAs, and were clear on how a reverse mortgage worked. But most baby boomers have a long way to go to become retirement experts. From a troubling sense of overconfidence to confusion about how long their savings will need to last, let’s take a closer look at 11 ways many boomers are clueless about retirement.

1. They’re overconfident

Boomers think they know it all, though the retirement quiz results suggest otherwise. Eighty-seven percent of respondents couldn’t muster more than a D on the retirement quiz, but 61% thought they had high levels of retirement income knowledge. And three-quarters of people surveyed felt a secure retirement was ahead of them.

“More and more Americans are retiring, but so few understand basic facts and strategies when it comes to ensuring that their retirement is a comfortable one,” Littell said.

Overconfident boomers might be making simple mistakes that make it harder to enjoy the retirement they want. For example, many lack a solid retirement plan.

Next: Talk is cheap, and two-thirds of people aren’t taking this crucial step.

2. They don’t have a written retirement plan

Retirement plan with graphs and glasses

Most boomers don’t have a written retirement plan. | iStock.com

Boomers might be confident a secure retirement is in their future, but they’re not doing much to prepare for what’s ahead. Two-thirds of people surveyed didn’t have a written retirement plan, even though most experts agree having such a document is essential.

At the very least you need to figure out how much money you will likely have in retirement, how much you need to live on, and how much you can safely withdraw from your accounts given how long you expect to live. You can try to do the planning yourself, or meet with a financial adviser who can work with you to create a retirement road map.

Not only do many boomers lack a retirement plan, but they’re on shaky ground when it comes to investing for the future.

Next: Boomers probably think they know more than they really do.

3. They’re unfamiliar with investment basics

Business investment and growth

When it comes to investing, many boomers don’t know much. | iStock.com

When asked about retirement investment basics, most survey respondents came up short. While 80% understood owning a mutual fund was less risky than investing all their money in single stock, they didn’t do so well on other questions.

Most didn’t realize small company stocks generally deliver bigger returns than other types of stock and bond investments, and only 30% knew an exchange-traded fund generally has lower fees than an actively managed fund. Many also didn’t understand how changes in interest rates affect the value of bonds. (For the record, when interest rates rise, bond fund values fall.) Misunderstanding these investment concepts could lead to mistakes that jeopardize a person’s financial future, especially for DIYers who aren’t getting help from a financial pro.

Boomers are also unaware of some simple moves they could make that would increase their income in retirement.

Next: There are specific steps you can take to increase your retirement security.

4. They don’t know the best way to increase their retirement security

retirement ahead sign

Many boomers are unaware of some simple moves they can make to increase their retirement security. | iStock.com

People nearing retirement whose savings are coming up short have a few good options for increasing their retirement security. One is to keep working for a couple of years past their planned retirement date. Another is to put off claiming Social Security benefits for two years. (You’ll get an extra 8% for every year you wait to claim until age 70.) But more than half of people surveyed didn’t pick either of these options when asked what they could do to increase their retirement security. One-third thought saving an additional 3% in the five years before retirement was the best strategy, and 25% didn’t know what they should do.

Let’s look a bit closer at boomers’ Social Security knowledge.

5. They don’t know how to get more money from Social Security

Social Security Benefits Application Form with pen and glasses

Waiting to claim Social Security benefits can mean more money in the long run. | iStock.com/photojournalis

Waiting to claim Social Security is one way to increase your retirement income, and it’s an especially smart strategy if you expect to live a long time. But 40% of survey respondents weren’t aware their benefits would increase for every year they wait to claim between age 62 and 70. And just under half didn’t realize a single person who expected to live until age 90 would be best off waiting until age 70 to start getting their Social Security checks.

Curious whether you should take Social Security now or wait? A break-even analysis will show you how long you’ll need to live in order to come out ahead if you wait to take benefits.

6. They think Social Security is bulletproof

social security protest

Social Security is not as secure as some people believe it is. | Alex Wong/Getty Images

People have been wringing their hands about the future of Social Security for years, but the anxiety doesn’t seem to be filtering down to some boomers. Just 25% were aware by 2033, Social Security will probably only have enough money to pay out 75% of promised benefits to retirees.

Does that mean our government-run retirement system is on the verge of collapse? Not exactly. Younger workers are going to keep paying in to Social Security, and retirees will probably keep getting benefits. But unless changes are made, such as increasing the retirement age or raising the Social Security tax cap, some people could end up getting less in benefits than they expected.

If boomers are a bit fuzzy on Social Security specifics, they have some even bigger misconceptions about how 401(k)s work.

7. They’re worried about their 401(k) for the wrong reasons

401K plan financials

Your 401(k) should be safe, even if your company goes bankrupt. | iStock.com/GaryPhoto

There are some good reasons for boomers to be worried about their 401(k)s. For one, many don’t have enough saved in their tax-advantaged retirement account, meaning they’ll need to learn to live on less once they stop working. About 46% of boomers have less than $100,000 in their retirement account, a survey by PricewaterhouseCoopers found. That’s a nest egg that will generate just a few hundred dollars a month in income, depending on how much you withdraw and your rate of return.

But it’s not low account balances that are keeping some boomers up at night. Instead, 25% of people surveyed are concerned if their company goes bankrupt, their 401(k) will be at risk. That’s not true. A company bankruptcy could jeopardize your pension, if you have one, but your 401(k) is yours no matter what happens to your employer. Your employer’s creditors can’t get at your retirement funds in your 401(k).

8. They’re underestimating how long they’ll live

emma morano

Emma Morano, then the oldest living person in the world, poses for a photograph in May 2016. She passed away April 15, 2017, at age 117. | Olivier Morin/AFP/Getty Images

Half of people surveyed underestimated how long the typical retiree will live. That’s a problem because not understanding average life expectancy could cause you to overspend in the early years of your retirement, leaving you broke if you live into your late 80s or 90s. In addition, many people said they wouldn’t bother to adjust their retirement plan if they had a 25% chance of living to a certain age versus a 10% chance.

So how long can you really expect to live? Your health and family history play a role, but generally a 65-year-old man has a 50% chance of living until age 87 and a 25% chance of living until age 93, according to Fidelity. A 65-year-old woman had a 50-50 chance of making it to age 90, and a 25% chance of living to 96. Yet many retiring boomers might not be anticipating a retirement that could last for three decades or more.

9. They don’t know how much they can safely withdraw from their retirement accounts

concept of Planning for retirement

Many boomers don’t know how much they can safely take from their nest egg each year. | iStock.com/jerry2313

The often-cited “4% rule” says you can withdraw 4% from your portfolio every year without a serious risk of running out of money before you die. This retirement rule isn’t universal, but it’s one you should be familiar with. Only 40% of survey respondents knew about the 4% rule. A third had no idea how much they could safely withdraw from their accounts, while 15% thought between 6% and 8% was a safe withdrawal rate.

Even if you don’t follow the 4% rule, you need to run the numbers to determine how much you can spend from your savings every year. Online calculators can help you determine how long your money will last, or a financial planner can work with you to create a customized projection.

10. They’re clueless about what their portfolio should look like

retirement

Choosing investments for a retirement portfolio can be a challenge. | iStock.com

A third of boomers admitted they had no idea how big (or small) a role stocks should play in their overall retirement portfolio. Confusion here is understandable because there’s no single right answer to this question. Some retirees want virtually no equity exposure in order to minimize risk, while others want to hang on to stocks to get better returns. Changing retirement realities (you’re likely to live longer than your parents, for example) and low returns for bonds affect how you decide to invest, but whether you’re for or against stocks in your retirement portfolio, it’s an issue you need to think about.

11. They haven’t planned for long-term care

elderly couple

Many boomers don’t have a plan for how they’ll pay for long-term care. | iStock.com

Only 36% of respondents said they had a long-term-care plan in place, and most had no idea how likely it was that they’d need long-term care. In reality, 70% of 65-year-olds can expect to eventually need some form of long-term care, according to the U.S. Department of Health and Human Services. Considering the typical stay in an assisted-living facility costs $3,628 a month and a private room in a nursing home will run you $7,698 a month, retirees would be wise to think about how they might manage those expenses. Medicare won’t cover all the costs, so the balance will need to come from your savings, long-term-care insurance, or other sources, such as help from family members.

Want to test your retirement income literacy? Take the test here.

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