Baby boomers are quickly approaching retirement, and many have already retired and are enjoying their golden years. But there are some costly mistakes that could turn the dream retirement into a nightmare for middle-class boomers.
The estimated median retirement fund for baby boomers is just $202,000, according to the Transamerica Center for Retirement Studies. So there’s not much room for error for middle-class boomers.
See: Eight Ways Baby Boomers Get Poor in Retirement
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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 in retirement.
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Holding individual shares
One of the biggest mistakes boomers can make with their investments is “maintaining concentrated positions in stocks without realizing the potential downsides,” Singh said. “Market volatility can cause significant fluctuations, so diversification is crucial.”
While investing in the next Amazon, Apple, or Tesla may seem attractive, keeping a large portion of your retirement in individual stocks is risky. If one of your largest holdings drops significantly in price, it could 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 reduce your risk and reduce the volatility of your portfolio.
Discover: Three Ways Upper Middle Class Retirees Stay Rich in Retirement
spend too much
One of the biggest problems as you approach retirement is “overspending and not living within your means,” Singh said. “It is vital to match lifestyle expenses with income. “Overspending can force greater withdrawals from savings, leading to faster depletion.”
An easy 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 wise financial decisions all month long.
Many retirees receive essentially fixed incomes and withdraw assets from retirement savings, pensions and other income sources. If there is no budget and overspending occurs, this can exceed the withdrawal rate supported by your retirement savings and could deplete your retirement faster than expected.
Accumulate high interest debt
One of the biggest mistakes boomers can make in their financial planning is racking up too much credit card or high-interest debt, Singh said.
“Such debt can be a financial burden in retirement,” he said, “particularly personal lines of credit or credit card balances that accumulate high interest.”
As people ages 60 and older look to stop working, racking up high-interest debt can lead to high minimum monthly payments and cost hundreds in interest. To avoid this, making a debt-free retirement plan can help reduce the monthly spending required to retire and give retirees some breathing room in their budgets.
To take it a step further, attempting to pay off a home mortgage can substantially reduce the monthly expenses required to retire and help you leave the workforce and start living off retirement savings much more easily.
Using only a 401(k)
A big mistake future retirees make is relying on pre-tax 401(k) savings without using Roth or tax-advantaged savings accounts, Singh said. “Relying solely on pre-tax savings means having to pay taxes on every withdrawal. Balanced tax pools can mitigate this problem.”
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-advantaged account (such as a health savings account) can help reduce your tax burden in retirement. Using just a 401(k) gives retirees a lot of leeway to control their taxes in retirement.
Applying for Social Security too early (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 can result in a loss of long-term benefits, while filing too late can deplete retirement savings,” Singh said. “Understanding income needs and wants is crucial to properly scheduling Social Security benefits.”
You can view your potential Social Security benefits by creating an account at SSA.gov and reviewing your earnings history. It will show the potential monthly income when claiming at age 62 (anticipation), 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 income. Therefore, it might be worth hiring a fee-based financial advisor to help you choose when to apply for Social Security benefits.
Lack of a long-term care plan
Medical expenses can destroy your retirement, especially if you don’t have the right insurance. Not having a long-term care plan is especially detrimental for married couples, Singh said. “The absence of such a plan can cause substantial financial strain, potentially leaving people bankrupt during critical retirement years.”
It’s a good idea to start exploring long-term care insurance plans as you approach retirement, and it should be part of your overall financial plan. Working with a licensed financial advisor can help you determine what an appropriate policy would look like, but be prepared for potential high premiums.
Not receiving help from an advisor
When you’re looking to retire, there are a lot of moving parts to your financial plan. From investing to insurance to tax planning and estate planning, it can be overwhelming even for the most financially savvy people.
One mistake middle-class boomers make when preparing to retire is not getting advice from a certified financial planner, Singh said. “Only a fixed-fee CFP can efficiently navigate these obstacles.”
While you may feel comfortable managing your own investments in retirement, meeting with a financial planner can help you create a comprehensive plan to manage withdrawals, plan for taxes, learn about insurance options, and help you create a realistic retirement budget. 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: The 7 Costliest Mistakes Middle-Class Boomers Make
