Financial Mistakes to Avoid for Baby Boomers

The majority of baby boomers are woefully unprepared for retirement, reports U.S. News & World Report. In large part, this is because baby boomers made too many critical financial mistakes. Financial_ArchsHere are some key ways boomers have failed at retirement planning and how you can avoid these errors in your own retirement preparations:

  1. Assuming what went up, will continue to go up. Many boomers bought homes or upsized to McMansions during the good years, often using highly leveraged, high risk, and unconventional loans. They assumed that this was a low risk activity because of the equity they hoped would accrue from continued real estate appreciation. They were wrong to assume this. The era of continuously increasing real asset values, equity markets, and bond yields is over, perhaps for years or decades. Boomers didn’t figure this out in time.
  2. Using dubious home equity as a primary retirement nest egg. For boomers who planned on using home equity as a retirement plan, their nest egg is now a cracked or empty shell. Homes are not investments. When they are paid for, homes deliver tax-free shelter services.
  3. Failure to diversify. Some boomers didn’t establish a proper allocation of investments into non-correlated asset classes. This takes careful study and thought. Instead, many boomers were oblivious to risk or focused on chasing returns from the hottest funds.

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  1. This is good general advice, but Boomers should be very careful about using diversification techniques to reduce market risk. Don’t get me wrong, being diversified is better than what a lot of investors do, which is to buy last year’s hottest funds and forget about them. But what most analysts fail to point out to investors is that the whole point of being diversified to reduce risk is to buy non-correlated assets so that some investments zig when others zag. That’s what typically happens when the general trend of the market is up and assets are simply getting rotated, but in a severe market correction, like in 2008, all asset classes get sold as investors go to cash. As such, correlations actually go up. This is a particularly dangerous scenario for Early Boomers. I wrote an article about this called “If you think diversification leads to prosperity, think again.” The article contains correlation stats for the past few bear markets. Here’s the post:

    btw, I love BoomerCafe. It’s a great blog!

  2. All good points. Retirement planning is considered “scary” to some people and thus often avoided.

    Frankly, getting organized with personal finances is the first step for many who want to undertake a financial planning process. Pulling account statements, insurance policies, key documents, etc out of the file cabinet and organizing the data so that it can be accessed in the future is important. People can create their own spreadsheets or documents to track the information, although there are drawbacks – data can be incomplete or incorrect.

    Javont Vault is a personal inventory software product that helps people to document their most sensitive and important personal information for the future. It’s one easy way to start getting organized and learn what assets/liabilities you really have.

    In full disclosure, I work for Javont, but I think that it is a hugely important product and it is a product that helps me to sleep better at night knowing that I have fully documented this type of information for my family.

  3. Thanks for sharing the article. The items are all very accurate, and provide insights on how to not make the same mistakes. Unfortunately, many people did not know about the risks involved in using home equity for their retirement nest egg at the time. There is a lesson in this for all of us, and hopefully the sooner our economy recovers the sooner people gain begin regaining some of the lost value of their homes.

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