Baby boomers are fast approaching retirement, with many already retired and enjoying their golden years. But there are some costly mistakes that could turn a dream retirement into a nightmare in a hurry for middle-class boomers.
The median estimated retirement fund for baby boomers is just $202,000, according to the Transamerica Center for Retirement Studies. So there is not a lot of margin for error for middle-class boomers.
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GOBankingRates spoke with Raman Singh, CFP and owner of Singh Private Wealth Management, to get the inside scoop on some common financial mistakes and how middle-class boomers can avoid them as they enter into retirement.
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Holding Individual Stocks
One of the biggest mistakes boomers can make with their investments is “holding concentrated stock positions without grasping the potential downsides,” Singh said. “Market volatility can lead to significant fluctuations, so diversification is crucial.”
While investing in the next Amazon, Apple or Tesla might sound enticing, holding a large portion of your retirement in individual stocks is risky. If one of your larger holdings drops significantly in price, it can hurt your long-term retirement plan.
Instead, Singh recommends focusing on diversifying your holdings, which might mean choosing index funds instead of individual stocks. As you approach retirement, diversifying into assets outside the stock market can help lower your risk and reduce the volatility in your portfolio.
Find Out: 3 Ways Upper Middle Class Retirees Stay Rich in Retirement
Spending Too Much
One of the biggest problems when approaching retirement is “overspending and not living within one’s means,” Singh said. “It’s vital to match lifestyle expenses with income. Overspending may force larger withdrawals from savings, leading to quicker depletion.”
A simple way to avoid this mistake is to create a simple budget, listing your income and expenses on paper. This gives you a spending guide for your money, helping you make sound financial decisions throughout the month.
Many retirees are essentially on fixed incomes, withdrawing assets from retirement savings, pensions and other sources of income. If a budget is not in place and overspending occurs, this can exceed the withdraw rate supported by your retirement nest egg and could drain your retirement faster than expected.
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Accumulating High-Interest Debt
One of the biggest mistakes boomers can make in their financial planning is accumulating too much credit card or high-interest debt, Singh said.
“Such debt can be financially burdensome during retirement,” he said, “particularly personal lines of credit or credit card balances accruing high interest.”
As those 60 or older look to stop working, piling up high-interest debt can come with high monthly minimum payments and cost hundreds in interest. To avoid this, making a plan to enter retirement consumer debt free can help lower the monthly required spending to retire and give retirees some breathing room in their budgets.
To take it a step further, aiming to pay off a home mortgage can substantially lower monthly expenses needed to retire and help you leave the workforce and start living on retirement savings much more easily.
Using Only a 401(k)
A huge mistake soon-to-be retirees make is relying on pre-tax 401(k) savings without utilizing Roth or tax-advantaged aavings accounts, Singh said. “Relying solely on pre-tax savings means being taxed on every withdrawal. Balanced tax buckets can mitigate this issue.”
While the 401(k) is the most popular retirement account available, it’s not the only place to save for retirement. Opening a Roth IRA or saving funds in another tax-advantages account (like a Health Savings Account) can help lower the tax burden in retirement. Using just a 401(k) does give retirees much wiggle room to control their taxes when they retire.
Filing for Social Security Too Soon (or Too Late)
Social Security is designed to supplement retirement income, but many don’t know when they should start claiming this benefit.
“Filing too early may result in long-term benefit loss, while filing too late can deplete retirement savings,” Singh said. “Understanding income needs and wishes is crucial for timing Social Security benefits appropriately.”
You can look at your potential Social Security benefits by creating an account on SSA.gov and reviewing your earnings history. It will show the potential monthly income when claiming at age 62 (early), age 67 (full retirement age) and even up to age 70 (maximum benefit).
But working with a licensed financial advisor who specializes in retirement planning and Social Security can help you maximize this benefit based on your retirement needs, tax situation and earnings. So it might be worth it to hire a fee-only financial advisor to help you pick when to file for Social Security benefits.
Lack of a Long-Term Care Plan
Medical expenses can destroy your retirement, especially if you don’t have the proper insurance in place. Not having a long-term care plan is especially detrimental for married couples, Singh said. “Absence of such a plan can lead to substantial financial strain, potentially leaving individuals broke during critical years of retirement.”
It’s a good idea to start exploring long-term care insurance plans as you get nearer to retirement, and it should be part of your overall financial plan. Working with a licensed financial advisor can help you figure out what a proper policy could look like, but be prepared for high potential premiums.
Not Getting Help From an Advisor
When looking to retire, there are a lot of moving parts to your financial plan. From investing to insurance to tax planning to estate planning, it can be overwhelming even for the most financially savvy individuals.
One mistake middle-class boomers make when preparing to retire is not getting advice from a certified financial planner, Singh said. “A flat-fee only CFP can efficiently navigate through these pitfalls.”
While you may feel comfortable managing your own investments in retirement, meeting with a financial planner can help you create a comprehensive plan to handle withdrawals, plan for taxes, learn about insurance options and help you create a realistic budgeting for retirement. This is an invaluable resource that can help you avoid most of the mistakes mentioned above.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 7 Costliest Mistakes Middle-Class Boomers Make
