Money Mistakes Costing Investors Their Retirement. Is There Time to Rectify?
The American workforce is experiencing a “silver tsunami” as a record 4.1 million Americans are predicted to turn 65 years old this year, and every year from now until 2027, according to a report by the Alliance for Lifetime Income. In the same report, data suggests that an average of 11,000 65th birthday celebrations will be held every day from now through to December 2024.
America has reached peak retirement age, and with millions of workers soon stepping out of the workforce and claiming their spot on the retirement bench it’s time to start taking stock of how older individuals have been investing their nest eggs over the years, and how the next generation of savers can rectify these mistakes before they end in the same position.
A generation of mistakes
Planning for retirement has never been more challenging for soon-to-be-retired Americans who have had to deal with a series of economic events, including a pandemic, followed by a minor recession, a housing crisis, eye-watering interest rates, and the spiraling cost of living.
Perhaps for many retirees and older savers, the changing market landscape has provided them with an opportunity to maximize alternative investment vehicles without risking too much of their capital.
However, for many of those who are stepping into retirement in the coming years, market dynamics have changed rapidly during the past few years, restricting how much leverage they may have, and posing a direct threat to their capital savings.
Lack of diversification
For many people, diversification is key to building a robust investment portfolio or retirement savings, but for some older generations, diversification has been one of their biggest sore spots for years, often seeing many of them losing thousands of their savings due to a lack of diversification efforts.
In fact, some studies have shown that Baby Boomers have among the most unbalanced portfolios compared to their other peers. An analysis of nearly 10,000 participants found that those ages 60 to 65 years old invested heavily in assets such as stocks, with 52 percent of those investing 70 percent or more of their savings in stocks.
Older individuals who still have time may need to start thinking of how they can rebalance their portfolios to reduce exposure to assets such as stocks, and instead include assets such as bonds, commodities, and real estate.
Using retirement accounts for debt
Retirees have more debt now than they had during the 1990s. Over 60 percent of Americans who are nearing retirement or have retired in recent years carry at least $70,000 in household debt, a figure that has been on the rise in recent years.
Many older individuals often use their retirement savings or accounts to pay for other financial expenses, such as children’s or grandchildren’s tuition fees, covering the cost of credit cards, or using their capital to pay off larger, more aggressive debts such as mortgages and maxing out their home equity line of credit.
Though the external factors of rising costs, alongside tighter interest rates may have forced many Americans to dip their hands into their retirement savings in recent years, older generations are thought to have used their retirement accounts more for non-essential financial burdens instead of leaving their accounts to grow.
Not contributing to a 401(k)
Roughly three in ten Americans who are almost nearing retirement don’t have enough money saved for their post-employment years. In fact, some individuals don’t even have a penny stocked away for their upcoming retirement.
Having full-time employment with retirement benefits is one of the best, and perhaps easiest ways to have a lead-up to retirement savings, allowing individuals to contribute towards their 401(k) savings account and having their employers contribute a portion of their wages on their behalf.
A recent survey of 2,700 respondents found that four in ten with full-time employment or part-time have not fully contributed or saved any money in their 401(k) plans or employer-sponsored retirement plans.
While not everyone may find themselves in the position to have an employee-sponsored plan, those who can contribute towards a 401(k) account are best advised to start sooner, rather than later as a way to improve the long-term financial benefit of these accounts.
Starting too late with emergency savings
Today, many Americans are not completely comfortable with their level of emergency capital stocked away. Overall, nearly half of Americans don’t have enough money saved for emergency expenses, according to a recent report.
The number of those stocking away cash in their savings has declined over the last year, with only 28 percent of people having at least six months’ expenses saved, compared to 30 percent in 2023.
Per generation, 46 percent of Baby Boomers have enough saved to cover six months’ worth of expenses, seeing as they had a longer time to stock away excess cash into interest-bearing accounts.
Having an emergency savings account, apart from traditional pension and retirement accounts, is crucial for anybody who’s looking to build a financial safety net.
Though some older generations might have had a lot more time to plan and save, this doesn’t exclude them from the fact that the majority of Americans are feeling uncomfortable with their level of emergency savings.
Not investing in alternative assets
Older savers have followed a more traditional strategy over the years, and while some may argue that it’s worked well for them, and has held up to its value, the changing market has meant that many younger and less-experienced savers will now need to start looking at investing in alternative assets to make their portfolios more competitive.
Overall, a recent Bank of America (BoA) study found that individuals aged 44 years and older are more likely to invest in traditional assets compared to younger people who tend to be more focused on alternative securities such as cryptocurrencies and digital assets.
In the BoA study, analysts noticed that older generations – those 44 years and older – split their portfolios as follows, U.S. stocks (41%), real estate investment (32%), emerging market equities (25%), international equities (18%), private equity (15%), direct company investments (15%), bonds (12%) and crypto or digital assets (4%).
Compared to those after them, real estate investments (31%) and crypto or digital assets (28%) make up the largest share of their portfolios. Additionally, a small percentage of those aged 21 to 43 years currently invest in U.S. stocks (14%), however, the overall share shows that wealthy Americans invest roughly 38% of their portfolios in stocks.
Though it’s a hard call to make on whether older strategies are more worthwhile compared to investing in more alternative assets, these activities play into the fact that many older savers and investors tend to lack a sense of diversification when it comes to investing and building portfolios.
Footing the bill for their adult children
An alarming number of older Americans are still paying for their adult children, with some even contributing up to $1,400 per month towards their children’s household bills.
While many American households may be struggling more than several years ago, and not every family might share the same level of financial security, many older savers and soon-to-be-retired Americans are still paying for their children even after they’ve left the house.
Baby Boomer parents are spending on average more than a thousand dollars per month towards their adult children’s monthly expenses, with those ten years or less away from retirement coughing up nearly $2,100 per month for their adult children’s expenses, while only stocking away less than half of this – about $643 – for retirement.
Some 61 percent of parents with adult children have previously said to have paid or financially helped their children, according to a different survey conducted by Bankrate. In this survey, it was found that those aged 23 and older often received financial assistance from their parents, with 37 percent saying their parents have helped pay their rent and 48 percent saying their parents are helping them cover their day-to-day expenses.
While parents are allowed to spend their money on their children as they please, keeping track of how financial assistance might be damaging their retirement planning and savings can be a way to cast a new light on the severity of the situation and the importance of establishing proper financial planning with children when they’re still young.
For would-be Gen Z and Millennial parents, this only paints a different picture of the type of financial literacy they need to provide their children with, even long before they are ready to enter the workforce.
Proper guidance and education can play a very important role in any child’s future, but more importantly, ensure that parents of adult children understand when they need to draw a line and start looking out for themself and plan for their financial future.
Saving and investing at an older age
Many Americans may have a different approach to investing or saving for the future, however, the majority of young people today are saving sooner and at an earlier age compared to their parents and grandparents.
In fact, the majority of Generation Z (45 percent) had already started investing at the age of 20 compared to 54% of Millennials that had invested before the age of 25. On the other hand, older generations were slightly behind, with more than half of Gen Xers investing at the average age of 32, while Baby Boomers (63%) were last to the party at 35 years, according to an analysis by Charles Schwab.
Although many Americans might argue that the cost of living and having to save up for big-ticket purchases such as buying a house or car is a lot more difficult now compared to their parents, around 51 percent of them feel that they are living a desired lifestyle compared to when their parents did at their age.
On top of this, the majority of working-class Americans find that they are doing a better job at investing their money or finding more ways to diversify their portfolios compared to their parents.
Access to relevant investment information has made more people confident in their investing strategies, including 71% of Gen Zers who are the most confident in their investment strategy compared to their older counterparts.
Having the opportunity to start earlier, and with a more aggressive investment strategy that can effectively navigate the changing market is what’s helping younger savers have an advantage compared to their parents and other older investors.
Finishing Off
The market has changed a lot since many soon-to-be-retired Americans were first exposed. Now with millions of Baby Boomers and a handful of Gen Xers set to retire in the coming years, it’s a time for younger generations to learn from their mistakes and allow them enough time to rectify these mistakes before they find themselves in a position where they are unable to support themselves financially in a rapidly changing market landscape.
