Why Baby Boomers May Not be Able to Afford Retirement

Written by , February 7, 2014

Why Baby Boomers May Not be Able to Afford RetirementAs increasingly larger numbers of baby boomers reach retirement, some are being faced with an uncomfortable reality – namely that they’re not in as strong of a financial position as they assumed they would be. In many cases, the financial realities of the situation are making it so that some of these individuals have to change their retirement plans.

While it might be tempting to attribute most of the situation to the recent financial crisis, the truth is that every generation has seen significant market declines (and usually multiple declines) in the time between entering the workforce and retirement.

Let’s examine some of the more substantive underlying reasons why baby boomers may not be able to afford retirement.

  • Debt. Retirement planning isn’t something that’s wholly separate from the rest of your overall financial picture. It’s true that your retirement accounts will generally be separate from your other savings and investment accounts, and that you won’t access them before retirement.
    • But you need to evaluate your financial situation by taking your debts into account as well as your assets and savings. You may have healthy balance is in your IRA and 401(k), but if you are also saddled with high levels of consumer debt, student loans and other financial liabilities, then you may not be able to afford the retirement you had planned.
  • Overestimating Your Other Investments. It’s always important to have a realistic overall picture of your broad investment and savings portfolio. You should periodically assess your performance assumptions other financial accounts and assets so that you don’t overestimate how much you’ll have in your taxable savings and investment accounts upon entering retirement.
  • Not Contributing Enough Early On. Baby boomers who entered the workforce in the late 1960s or early 1970s did not yet have the IRA or 401(k) structure to use for retirement. Individuals who did not start saving for retirement early were not able to take maximum advantage of the power of compounding to help their nest eggs grow.
  • Underestimating Your Life Expectancy. Many new retirees tend to underestimate the number of years they’ll be relying upon their retirement savings for. For example, according to Social Security actuarial tables, a 65-year-old man can expect to live to age 82, and a 65-year-old female can expect to live to age 85. Funding two decades of retirement requires a large nest egg.
  • Underestimating Your Medical Expenses. A related issue is how much of your retirement savings could be eaten up by medical expenses. Just a single uninsured medical emergency occurring later in life (whether before retirement or just after) has the potential to wipe out years or even decades of savings. Note that these expenses might be for your own medical care, a spouse’s care, or even for that of a child or parent. In the case of caring for parents, note that long term care might also be a significant financial burden.
  • Even if your retirement reality isn’t as rosy as you had hoped, you can still make the best of the situation by first taking an honest assessment of where you now stand.

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