Millions of working-age Americans between the ages of 56 and 64 are approaching retirement without adequate savings. About 27% of Baby Boomers have no retirement accounts, according to a recent report by Credit Karma, raising concerns about their financial security in retirement.
Paul Doak, a certified financial planner with over 25 years of experience, discusses why baby boomers may have trouble saving for retirement.
Doak explains that Individual Retirement Accounts became widely available in the mid-1970s and were clumsy at best back then. Trading the market was considered a “rich man’s game” due to the high costs involved. Even though 401(k) plans have been around since 1978, many smaller businesses either couldn’t provide them or couldn’t afford them.
Initially, both IRAs and 401(k) plans made a negative impression on workers. People had to be educated by widespread campaigns to join in. By then, many Baby Boomers had already made significant financial commitments to mortgages, education, and their families.
While pensions formerly held great promise, many of those plans defaulted in the 1970s and 1980s, notes Doak.
Baby boomers still rely heavily on Social Security. The TransAmerica Center found that Baby Boomers (34%) are more likely than Generation X (23%) and the younger generations (14%) to expect Social Security to be their primary source of retirement income. According to the study, baby boomers are less likely to think Social Security won’t support them, supporting their belief in the program.
According to Epoch Times, the OASI Trust Fund, which pays monthly benefits to retired workers, their spouses, and the survivors of deceased insured employees, is projected to be depleted in 2033. This estimate is one year earlier than previously estimated last year, with 77% of benefits payable then. This would mean massive cuts to the benefits that 67 million retired Americans receive monthly from Social Security. In response to the volatile economic environment, more baby boomers expect to retire later than expected or even work their entire lives.
Retirement savings alternative
According to Derek DiManno, Founding Financial Advisor at Flagship Asset Services, alternative options remain for baby boomers who don’t have access to traditional retirement accounts like 401(k)s or pensions. One popular choice is an IRA, which allows individuals to contribute money on a tax-advantaged basis.
Traditional IRAs offer tax deductions on contributions, while Roth IRAs provide tax-free withdrawals in retirement and tax-free investment growth-the most significant benefit of Roth IRA, which maximizes your savings. Account holders won’t be subject to further taxes on their account’s earnings as it grows or when they withdraw money in retirement.
Another option DiManno notes is a Health Savings Account, which offers tax advantages if you have a high-deductible health insurance plan. HSAs can be used to cover medical expenses in retirement.
Additionally, baby boomers can explore investment vehicles like mutual funds, stocks, bonds, or real estate. These alternatives, DiManno admits, involve more risk and require careful consideration, so it’s essential to seek guidance from a financial advisor who can help navigate these options.
Strategies to manage priorities
DiManno suggests budgeting by identifying essential expenses and creating a budget that allows for retirement savings. Unfortunately, this might mean making hard choices such as downsizing homes or cutting back on non-essential expenses.
Pay off high-interest debts
Debt can also be a significant hindrance for many boomers. Baby boomers have an average of $25,812 in debt. Interest on high-interest debt is expensive, and the longer you keep it, the more expensive it becomes. Paying off high-interest debt allocates extra funds toward debt repayment and can help you prioritize retirement savings better.
Additionally, DiManno advises taking advantage of catch-up contributions offered by the IRS for individuals aged 50 and above. This enables you to contribute more than the standard limit to several workplace savings accounts each year to accelerate retirement savings.
It’s still possible to begin an automatic savings plan which can take many forms. Robert R. Johnson, Professor of Finance, Heider College of Business, Creighton University, notes that a specific dollar amount or salary percentage can be taken out of each paycheck and put in a retirement or savings plan. According to Johnson, the biggest advantage of automatic methods is the “behavioral underpinnings” of the plans. “If we are enrolled in an automatic savings plan, inertia and the inherent laziness of people tend to work in our favor,” He says. “People tend to stay enrolled once in an automatic savings plan.”
Finding the right balance between immediate financial responsibilities and long-term retirement investments can be difficult. The trick is to figure out how to save for retirement without sacrificing your ability to take care of your immediate financial obligations.