Boomers may learn some hard lessons about retirement

By Eileen Ambrose

The Baltimore Sun

The oldest baby boomers turn 56 this year, and for this age-defiant generation that means retirement is no longer far off.

But many have only vague ideas of how much they will need for retirement and how to reach that goal. Even worse, many hold misperceptions about retirement that could backfire, experts said.

Here are some common mistakes:

Overestimating investment returns. “They are unduly influenced by what happened in the late 1990s,” when 20 percent-plus returns were a regular occurrence in the stock market, said Marvin Burt, a Rockville, Md., financial planner.

The past two years of negative market returns have been sobering, but not enough to bring expectations back to reality. “Instead of assuming they are going to get 20 to 25 percent, investors now may be thinking of getting 15 percent which is still absurdly high,” Burt said.

The historical return for the stock market is about 10 percent to 12 percent. But as investors near retirement, they tend to adopt a more diversified, conservative portfolio, adding cash and bonds with even lower returns. When creating a retirement plan, Burt figures a 6 percent to 8 percent return.

Overdrawing. Inflated expectations about returns can lead to overblown withdrawals that can empty a nest egg quickly, said Barry Glassman, a financial planner in McLean, Va.

Boomers might figure they will earn 10 percent a year on their portfolio, and, therefore, will be able to withdraw 7 percent in retirement, he said.

But it’s also possible that the portfolio could lose 10 percent, and a 7 percent withdrawal on top of that could reduce a $1 million portfolio to $830,000 in a single year.

Glassman suggests an initial withdrawal rate of 5 percent or less, and making adjustments up or down later depending on portfolio performance.

Changing living expenses. For years, the rule of thumb has been that workers will need 70 percent to 80 percent of their pre-retirement income to maintain their current lifestyle in retirement.

“Most people we see are retiring to an active lifestyle spending as much money as before,” said Lyle K. Benson, a Towson, Md., financial planner.

Expecting too much from Social Security. Most people are unaware of what their Social Security benefit will be and assume it will be enough to live on, said Pat Humphlett, program director for the Women’s Institute for a Secure Retirement in Washington, D.C.

For the average worker, the benefit replaces 40 percent of their income. “You need more than that to maintain your current lifestyle if you retire,” Humphlett said.

The Social Security Administration mails a benefits statement to workers 25 and older a few months before their birthdays. If you haven’t received an estimate, you can request one online at www.ssa.gov or by calling 800 772-1213.

Retiring early. The majority of people retire at age 62, but boomers might find that they must work three to five years longer, Hushbeck said. Of course, more boomers have come to this realization in the past year and a half when they opened up 401(k) statements and found their balances ravaged by falling stock prices, she said.

Underestimating longevity. “It’s hard to get people to consider mortality,” and because of that they sometimes underestimate how many years they will live in retirement, said Don Blandin, president of the American Savings Education Council in Washington, D.C. But that can lead to boomers retiring too early or failing to save enough for retirement, he said.

Living a life of leisure. Retirement for boomers likely won’t be the traditional work stoppage and then full-time golf or gardening. Benson said.

The most successful retirements will be those where retirees have planned a transition from work life to a pursuit of new goals and activities, he added.