(MoneyWatch) Millions of baby boomers are approaching retirement as unprepared as Aesop's grasshopper. Here are 18 reasons why that's the case.
They fail to plan. To develop a well-designed plan, you must determine how much you'll spend. And unforeseen events that could create demands on capital must be planned for as well. The investment plan should be integrated into an overall estate and tax plan that includes wills and financial/health care durable powers of attorney.The failure to save early makes accumulating sufficient capital far more difficult. They fail to start saving early.
Because equities have historically provided a return of about 10 percent, investors may assume they will earn that rate going forward. Unfortunately, most financial economists are forecasting future returns will be lower (e.g., 7 percent). And historically the average actively managed fund and the average investor have both underperformed the market by significant margins. They overestimate expected equity returns.
Unfortunately, returns are not constant, and systematic withdrawals during bear markets exacerbate their effects, causing portfolio values to fall to levels from which they may never recover. Historically, a safe harbor withdrawal rate for a 65-year old couple has only been about 4 percent (adjusted each year for inflation). Given today's lower yields and lower expected stock returns, even that figure may be too aggressive. They fail to consider that the order of returns matters.
The average person will need to replace 80-90 percent of their pre-retirement income. They underestimate their needs.
For the average 65-year-old couple, the life expectancy of the second-to-die is about 25 years. That means half can expect to live longer. Since being alive without sufficient assets is unthinkable, your plan should extend beyond life expectancy. They underestimate their investment horizon.
People frequently retire early, often for good reasons. Unfortunately, there are also negative reasons, such as having to leave the work force due to health reasons, loss of job, or having to take full-time care of a spouse or elderly parent. A good retirement plan considers contingencies, including the need for disability insurance. They overestimate their ability to continue working.
They become to
via www.cbsnews.com