For Baby Boomers in their peak earning years, it's the best of times and the worst of times. According to our recently released research report on the generations, Baby Boomers tend to have the strongest overall financial positions. However, an increasing number are discovering that they're not on track for retirement and don't have as much time as the younger generations to close the gap. If you're a Boomer, here are some steps you can take:
Make sure your investment portfolio is properly diversified. Your investments become increasingly more important as you approach retirement since you won't have as much time to recover from a big loss. However, our research showed that 30% of Boomers had 15% or more of their portfolio in one stock and Boomers saw the biggest decline in re-balancing their investment accounts of any generation.
If you have more than 10-15% in any one stock, consider diversifying it immediately. That's because an individual stock can go to zero and never recover. This is especially risky for employer stock since you could be out of a job at the same time that your savings are decimated.
Then make sure your overall portfolio is allocated appropriately between different types of investments like stocks, bonds, and cash. The easiest way to do that is with a balanced fund or a target date retirement fund. You can also choose your own mix using these guidelines and re-balancing periodically.
Get control of your day-to-day finances. Take a look at your bank and credit card statements for the last 3 months and record your expenses on a worksheet like this. This will give you an idea of where your money is going.
There are a couple of reasons you'll want to do this. The first is to make sure you're not spending more than you have coming in and running up debt. Debt payments can be a huge burden in retirement and is one reason many people are postponing retirement. The Employee Benefits Research Institute found that heads of households aged 55 to 64 carried the highest levels of debt, with the average debt load at $107,060 in 2010, and our research showed that 42% don't have a plan to pay off their debt. If you have debt, you'll want to look for savings in your spending that you can use to pay off the debt by the time you retire.
The second reason to know your expenses is to use it to estimate how much income you'll need in retirement. Think about how your expenses may change. How much can you save on gas and eating lunch out at work? Will your mortgage and other debts be paid off? Do you plan to downsize or re-locate?
See if you're on track for retirement. Once you have an idea of how much income you'll need, run a retirement estimator. (You can get a projection of your Social Security benefits here.)
According to our research, Boomers had the greatest increase in the percentage knowing they're not on track for retirement. This may sound like all bad news but knowing there's a problem is the first step in fixing it. If you're not on track, try to close the gap by saving more, retiring later, or reducing your retirement expenses.
Plan for long term care. You can do everything perfectly right in building up a retirement nest egg only to see it wiped out with a few years of long term care. This isn't some remote possibility either. It's been estimated that about 70% of 65-yr olds will need some form of long term care. In particular, the Alzheimer’s Association projects that the cost of dementia will rise from over $220 billion last year to more than $1 trillion in 2050.
However, Medicare doesn't cover long term care and Medicaid generally requires you to spend down practically all of your assets (and anything you gave away in the last 5 years) to qualify. In some states, your kids could even be on the hook for your care. Yet, our research reveals that only 15% of Boomers have a long term care insurance policy and 71% haven’t even considered it.
If you have between $200k to $2-3 million in assets, you may want to purchase long term care insurance. See if your state offers a long term care partnership program, which allows you to keep an additional amount of assets equal to the insurance coverage you purchase through the program and still qualify for Medicaid if you use up all the benefits. That way you know exactly how much insurance to buy: enough to CYA or cover your assets.
Prioritize yourself. Finally, whether you're trying to get out of debt, save more for retirement, or pay for long term care insurance, make sure those needs are covered before saving for your kids' or grandkids' education. After all, there's no financial aid for retirement and being a role model in financial independence is one of the best gifts you can give your loved ones.
