There are several potential pitfalls Baby Boomers face when determining their expected income needs for retirement. In this newsletter we’ll take a look at four major mistakes Baby Boomers make when it comes to planning their retirement.
1. Never underestimate your life expectancy
It used to be that financial planners routinely created retirement plans that stopped at age 85. This was when chances seemed pretty good their clients would have passed on by then.
Not today, however. Fidelity Investments found that the chances of one member of a couple living beyond 90 are about 50%. So, be very careful about how you plan your retirement finances.
2. Will you really be working past 70?
“Oh, I’ll be working past retirement, that’s for sure.” We’ve all heard that statement too often from Baby Boomers. How they’ll actually feel once they are in their 60’s and 70’s may be an entirely different matter. Right now, the typical retirement age is 62, according to the Employee Benefit Research Institute. And nearly 40% of retirees say they left the workplace earlier than they’d planned, often because of illness, disability or layoffs.
3. Factor in Health Care Costs
Employers increasingly are eliminating retiree health coverage. You can’t get Medicare coverage until you’re 65. And there are plenty of costs this government program doesn’t cover.
For many Baby Boomers it makes sense to consider home care providers wherever possible. The latest study published by Genworth Financial, Inc. notes that while the cost of facility-based providers has steadily increased (a 4.5% annual growth rate since 2005), non-skilled related home care costs have remained relatively flat.
Still it makes sense to consider buying long-term care insurance in your 50s or 60s to help cover the expense. Boomers should be planning ahead to cover the cost of their health care, as health care costs are expected to grow even more going forward.
4. Avoid the low-yield, safety net investments
When investing for income, locking in subpar returns found in certificates of deposit (CDs) and immediate annuities can become damaging. While great in concept i.e. a way to lock in a lifetime stream of income, the annuities only offer payments that reflect the prevailing interest rates. If you buy an immediate annuity now, you could be locking in rates that are still near record lows. Remember. bond annuities and bonds do not keep up with inflation. So the dollar you have today will not be enough to keep food on the table in the next couple of years.
All of these factors point to one key message: invest in value stocks that pay dividends!
Copyright 2011, CAIM LLC
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