Retirement Planning: A Baby Boomers’ Bust?

Baby boomers beware. Retirement is closer than you think. And, to make matters worse, you may not be able to rely on the government and your employer to fund a secure retirement. There are several reasons for that as follows.

First, more and more companies are phasing out guaranteed pensions and shifting toward defined contribution plans, such as the 401(k), where the plan’s benefits depend on how much the employee contributes and how successfully he or she invests those contributions. Then there is the widely held belief that Social Security might not be around, at least not in its present form.

Add to that the poor savings habits attributed to the baby boomers generation and you have the need for some serious thinking.

The bottom line is that, if you’re a baby boomer, you had better start saving for retirement like you mean it. The sooner you get serious about it, the better off you will be. By exploiting the following strategies, baby boomers can still achieve a level of retirement security.

Maximize 401(k) Plans

Employer-sponsored 401(k) plans that boast tax-deductible contributions and tax-deferred earnings along with generous employer matches are the best hope for millions of baby boomers. If you don’t do anything else, contribute every dollar you can, up to the maximum allowed. Also, be sure to make the most of your employer’s match. Moreover, if your plan allows after-tax contributions, go for it. You won’t get the deduction, but the tax-deferred feature of 401(k) plans means your money grows faster.

Don’t Be Too Conservative

Numerous studies have found that employees tend to invest too conservatively. The challenge for boomers is to invest aggressively enough to overcome a late start, but not enough to seriously jeopardize their future. Most experts agree that with retirement 10 or more years away, you can still invest a substantial portion of your long-term retirement savings for growth in stocks or stock mutual funds, as long as your portfolio is sufficiently diversified. Stocks can be potentially volatile investments, but history has shown that over the long term they tend to be the most profitable. As you move closer to retirement, you can begin to move your funds into more conservative investments.

Fund an IRA or Keogh

Traditional Individual Retirement Accounts (IRAs) can provide a good foundation for your retirement savings program. Depending on your income and other factors, your contribution may be fully, partially, or not at all deductible. In any case, the greatest tax savings with IRAs is not in the initial IRA contribution, but in the tax-deferred compounding of interest. The same thinking holds true for Roth IRAs. While contributions to a Roth IRA are not deductible, they, too, accumulate earnings entirely tax deferred. The added benefit of the Roth IRA is that distributions in general are tax-free.

If you have self-employment income, set up a Keogh Plan and make regular tax-deductible contributions. Like other qualified retirement plans, earnings from Keoghs are tax-deferred.

Don’t Discount Social Security Entirely

You can expect a Social Security check when you retire, but it’s likely that the benefit you receive will replace a smaller percentage of your income — and you’re likely to find that more of your Social Security benefit will be subject to tax. For an estimate of how much you’ll get when you retire, call the Social Security Administration (SSA) at 800-772-1213 and ask for a “Request for Earnings and Benefits Estimate Statement” form. Check your form carefully to make certain that the SSA has recorded your wages accurately.

Stop Spending So Much

Heed the financial advice of experts and pay yourself first. Have your bank transfer a fixed amount each month to a savings or mutual fund. What you don’t see, you won’t miss — and more importantly — you can’t spend. If you’re lucky enough to reach the point where your mortgage is paid off or you’ve paid that last college tuition bill, you’ll have a large chunk of money you can redirect into saving for retirement.

Pay Off Your Home Mortgage

A home of your own stabilizes your living costs and provides inflation protection. In your retirement, the equity you have built up in your home can become a valuable source of income. You can sell your home, move into a smaller one, and live off the profits. When you own your own home, you also have the option of taking out a reverse mortgage.

Baby boomers should be cautious against becoming overwhelmed by what might seem to be an impossible goal. With personal discipline and wise spending, saving, and investment choices, baby boomers still have enough time to secure a comfortable retirement.