Half of Boomers Could Struggle to Pay Themselves in Retirement

 In Personal Finance, Retirement


When most people think about retirement, they imagine decades of relaxation without a worry in the world. At the very least, they won’t have to worry about waking up and going to work anymore.

Of course, that also means they won’t be receiving a paycheck after they retire either.

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Do you have a plan to make that up?

Lost in the typical discussions about retirement is any real conversation about not just having a nest egg but also have regular payments coming in – something to take the place of the paycheck you once received.

Sadly, as many as half of Baby Boomers may not be able to do this once they retire. I’ve talked before about how Boomers don’t know when to retire, but it turns out that most also don’t know how to.

Why You Need Payments Coming in After Retirement

To put it simply, you can’t hope to withdraw regular amounts from your retirement nest egg for the rest of your life. There are a number of different reasons for this but suffice it to say, inflation will make it hard to keep those savings. No one can possibly predict where inflation will go in the years to come, but it’s better to be prepared by having some source of revenue once you quit working for good.

No one can possibly predict where inflation will go in the years to come, but it’s better to be prepared by having some source of revenue once you quit working for good.

Boomers with TDFs Aren’t Taking Full Advantage of Them

Target-Date Funds (TDFs) are meant to hold all of an investor’s plan assets in one, diversified fund. The name is a reference to the fact that the fund is designed with the investor’s intended retirement date in mind.

Although they are a highly popular vehicle for investing retirement funds, it turns out that most Boomers probably aren’t taking full advantage of them.

According to research done by Aon Hewitt and Financial Engines:

  • 62% of TDF users invest just part of their plan assets into these vehicles.
  • Only 57% of those who began with all of their assets in TDFs kept them there after five
  • The result of partial investment cost investors 2.11% in annual returns compared to those with the majority of their retirement assets in TDFs.
  • Just 25% of TDF holders have all their assets in them.

Most of those surveyed in the study – 62% – who weren’t making the most of TDFs said that they were concerned about putting all of their eggs in one basket. Others wanted more personalization from their investment vehicles.

The study also looked at the specific reasons influencing “Decreasers.” This refers to those people who moved money from TDFs after having invested all of their assets.

Aside from echoing the above, they’d also say that they wanted advice and/or personal management services where their retirements were concerned.

While there may be something to be said about their preferences, it’s yet another reason why so many – maybe even the majority of – Baby Boomers are going to retire with no real source of reoccurring income to help them during their golden years.

Understanding the Majority

Now, the above only refers to those using TDFs. What about everyone else? They’re hoping that employee pensions and or 401(k)s will come to their rescue.

The former pays out a fixed amount every month, while the latter generally doesn’t. 401(k)s also depend on how much employers put in on their own.

There’s an interesting distinction to be made with this population, too. 71% of current retirees are relying on employer pension funds. Compare that to 75% of pre-retirees who are going to be depending on a 401(k).

retirement accounts 401K IRA

Most Boomers Probably Don’t Even Have a Plan

Though much of the above probably paints a pretty gloomy portrait, there are glimmers of hope. At least many Boomers likely have some form of retirement vehicle (maybe even more than one) that will be waiting for them once they quit working.

That’s not the same as having a solid plan in place, but at least it’s a start.

Unfortunately, according to Ameriprise, 48% of pre-retirees have no income plan – at all. To put that another way, these Boomers have savings of some sort, but they have absolutely no idea about what that will mean for a post-retirement monthly income.

Boomers Are Overconfident

You may be wondering how Boomers got to this place where so many of them are setting themselves up to struggle, if not ultimately fail altogether.

As it turns out, one of the biggest reasons Boomers may struggle to pay themselves during retirement is because they are extremely confident.

In the Ameriprise survey we referenced above, 92% of responders said they felt confident that their savings – just their savings – would be enough to see them through the entire extent of their retirements.

We already talked about why this is a bad idea, but it turns out the reason why so many Boomers are sure of it is because 85% of them have created detailed plans about how they will pay themselves during their golden years. These plans cover everything from taxes to expected health care costs to vacations and more.

Keep in mind; most Boomers did not strike it rich. It’s not as though they have tens of millions of dollars saved away for retirement.

Even still, the real reason these plans are no good is because 26% of retirees have reported that they were caught off guard by how much retirement costs. Detailed plans don’t amount to much if you don’t know what you’re doing when you create them.

In that aforementioned Ameriprise article, Marcy Keckler, vice-president of financial strategy points out that:

“It’s never too late to craft – or update – a retirement plan. The important thing is just to get started. And that’s where an advisor can serve as a trusted resource and a powerful ally. The right advisor can help position you for a more confident retirement.”

If you’re a Boomer who doesn’t have a plan in place – or even if you think you do – make sure you seek help from an actual professional with experience in these matters.

Otherwise, your retirement may end early or get delayed indefinitely.

saving for retirement

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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