Studies show many baby boomers are financially unprepared for retirement, and experts say that indicates they made crucial money mistakes along the way.
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Young professionals can learn from the missteps of that older generation – born between 1946 and 1964 – and perhaps make their own road to retirement smoother.
A recent Bank of America survey showed that some from the younger generations are on the right financial path. Millennials, for example, outscored their parents’ generation in most aspects of personal finance.
“Younger generations can definitely learn some things about money from baby boomers, and not because most boomers have done things right; quite the contrary,” says Richard W. Paul, president of Richard Paul & Associates, LLC (www.rwpaul.com) and the author of The Baby Boomers’ Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead.
“For one thing, certainties the older generation had and hung onto have mostly evaporated, which makes it incumbent on young people to educate themselves, avoid those pitfalls, and make better decisions in a far more uncertain world.”
Paul lists four financial mistakes made by baby boomers that younger generations can learn from:
- Buying too much house. A home much larger than a person, couple or family needs or can reasonably afford often squeezes their overall monthly budget and restricts saving. “This is such a trap young, successful people on the way up fall into,” Paul says. “You have a higher mortgage and property tax, and it stretches you too thin, leading to credit card debt and generally putting you behind at a time you should be getting ahead.”
- Cashing out a 401(k). Some people are tempted to do this between jobs, but it’s usually a mistake tax-wise. “You should roll the old 401(k) money into an IRA or the new employer’s 401(k) to avoid tax penalties and let your retirement account continue to grow,” Paul says. “You want it invested in a broad range of mutual funds.”
- Not investing in rental properties. “Buying rental property at a young age can be a smart investment, cushioning for retirement because it provides steady, inflation-adjusting income,” Paul says.
- Counting on Social Security. A report from Transamerica Center for Retirement Studies shows that millennial workers are saving at earlier ages than previous generations. That’s mainly due to uncertainties about the future of Social Security. “Ideally, you should be saving 15 to 20 percent of your income now,” Paul says. “Many baby boomers counted on a future stream of income from Social Security, a pension, or both, starting around age 65 and continuing for the rest of their lives. But those retirement benefit programs didn’t count on people spending 30-plus years in retirement, which is becoming more and more common.”
“Educate yourself with as much information as possible,” Paul says. “Young people have a lot of history they can draw from as to what not to do.”
About Richard W. Paul
Richard W. Paul is the president of Richard Paul & Associates, LLC and the author of The Baby Boomers’ Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead. He is a Certified Financial PlannerTM professional, Registered Financial Consultant, Investment Adviser Representative and an insurance professional holding life and health insurance licenses in Michigan and Florida.