Are You Need a Baby Boomer? You Need This Much Money to Retire Comfortably
The Baby Boomer generation is reaching retirement age in record numbers. With more Boomers retiring on a daily basis, it helps to understand how prepared they are to leave their jobs for good. In this article, we’ll discuss the average retirement savings for Baby Boomers, and provide tips for how to boost retirement income.
Regardless of which generation you belong to, a financial advisor can help you get ready for retirement.
Average Retirement Savings for Baby Boomers
According to the Transamerica Center for Retirement Studies, the estimated median retirement savings for Baby Boomer is $202,000. Based on the 4% Rule, this would yield an annual retirement income of $8,000 per year. Depending on your perspective, this portfolio size could be more or less than you expected. Transamerica also found that about 45% of Baby Boomers have saved $250,000 or more. Further, 40% of Boomers agree with the statement that they have not done enough to save for retirement.
A study by the Stanford Center on Longevity found that people born from 1948 to 1953 had a median balance in tax-advantaged plans of $290,000, while those born from 1954 to 1959 had a median balance of $209,246 in their tax-advantaged plans.
One item that puts this in perspective is that the Boomer generation was the last to have widespread access to workplace pensions. With expected retirement income from pensions, many Boomers didn’t feel the need to save as much as succeeding generations.
Additionally, for Boomers who are still working, this number should continue to rise as they make additional annual contributions and their investments grow. If you use the Rule of 72, the youngest Boomers could expect to have one last “doubling” of their retirement nest egg with average returns of 8% to 10% before they reach 67.
How Baby Boomers Can Increase Retirement Income
Retirement income is an important topic for people close to retirement age. These steps are simple ways to boost the average savings retirement savings for Boomers. For each strategy that you are able to implement, you’ll increase your potential retirement income.
Maximize Retirement Plans
By contributing the maximum every year to your retirement plans, you’ll create a larger nest egg to withdraw from in retirement. Additionally, if you contribute to pretax retirement plans (like a 401(k), 403(b), or 457 Plan), you’ll reduce your tax bill every year providing extra money to invest. For 2022 you are allowed to contribute up to $20,500 in these plans.
Conversely, by contributing to post-tax retirement plans like a Roth IRA, you’re creating tax-free income in retirement. These plans do not have required minimum distributions starting at age 72, so this tax-free money can continue to grow for many years. You can add up to $6,000 per year (2022 annual limit) to your Roth IRA, depending on your income.
Catch-up Contributions For Savers Over 50
When you reach age 50, you’re allowed to make “catch up” contributions to your retirement accounts. This means that you can add an additional $6,500 to your company retirement plans and another $1,000 to your IRA (Traditional or Roth). These catch-up provisions help you boost your retirement savings in the final years before retirement. The more you are able to put away, the larger your nest egg will grow and produce monthly income in retirement.
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Use a Brokerage Account
When you’ve maxed out your retirement savings, investing through a brokerage account is a good idea. There are no contribution limits or withdrawal rules to worry about. While most retirement plans have limited choices, you have infinitely more investment options to choose from in a brokerage account.
Brokerage accounts can also help with your tax planning strategies since you can pick and choose which assets to sell. For example, you can benefit from capital losses that offset an unlimited amount of capital gains and up to $3,000 of ordinary income each year. And when you sell winning investments after holding them for longer than one year, those profits are taxed at lower capital gains rates.
Use a Health Savings Account
A health savings account offers triple tax benefits. Your contributions are tax-deductible each year when paired with a high-deductible health insurance plan. The money grows tax-deferred while it is inside the account. And your withdrawals are tax-free when used for eligible medical expenses, including Medicare premiums. Plus, there are no required minimum distribution requirements so the money can continue to grow and cover future medical expenses in retirement.
Purchase an Annuity
Annuities are another investment option that provides tax-deferred growth for your investments. These insurance products provide returns that mimic a variety of assets, including fixed income and the stock market. Equity-index annuities offer the best of both worlds. It offers guarantees similar to fixed income, but the potential to earn more with participation in the stock market.
When you need retirement income, you can withdraw as needed or annuitize your balance for guaranteed income like a pension. The monthly annuity payments are a combination of principal and interest. Your principal is returned tax-free. However, you must report all interest on your tax returns.
Cash-Value Life Insurance
Buying a cash-value life insurance policy allows you to purchase a death benefit to protect your loved ones with the ability to invest additional cash. As your cash balance increases, it has the potential to increase your death benefit for your beneficiaries. Additionally, you may be able to withdraw the cash tax-free when taken as a loan. When you pass away, the unpaid balance is deducted from your death benefit.
Delay Taking Social Security
The full retirement age for people born between 1943 and 1954 is 66. And everyone born after that, it is age 67. For every year that you delay taking Social Security, your monthly benefit increases by 8%. While it can be tempting to take the guaranteed money today by starting Social Security early, waiting can be very lucrative.
If you are able to until 70, you’re guaranteeing a 32% increase in the monthly benefit. This extra income is yours for the rest of your life. This extra money also impacts anyone getting survivor benefits. For people who have a long life expectancy, this additional money really adds up.
Baby Boomers, Defined
The Baby Boomer generation is the nickname given to people born between 1946 and 1964. This generation covers more than 20 years of births and most people assume that it’s a homogenous group of people. However, there is actually quite a lot of variety in the ages, personalities, experiences, and goals for Boomers.
Common thinking is that you’ve reached retirement age when you turn 65 years old. However, that isn’t always the case. Social Security considers age 66 full retirement for people born between 1943 and 1954, and age 67 for everyone born after that. Plus, modern advances in medicine and nutrition help people live longer and enjoy healthier lives well beyond conventional thinking. For example, the last two U.S. presidents and numerous members of Congress, the Supreme Court, and CEOs of major corporations are all over the age of 65.
The first Boomers born in 1946 reached 66 in 2012, yet the last Boomers won’t hit full retirement age until 2031. Many Boomers continue to work because they enjoy the challenge, while some have to because they didn’t save enough. Others retire based on the growth of their net worth thanks to all-time highs in the stock market and housing values.
The Bottom Line
The average retirement savings for Baby Boomers is just over $200,000. Since the last Boomers won’t retire until 2031, there is still plenty of time to boost their retirement savings. By contributing to retirement plans and using other accounts, they can use their peak earning years to sock away additional money. This enables market returns and ongoing contributions to maximize their nest egg and the income that it produces. For a personalized recommendation, we suggest speaking with a financial advisor to create your retirement plan.
Tips for Maximizing Retirement Income
In order to maximize your retirement income from your portfolio, you need to grow your investments. Regular contributions to your investment accounts and investing for growth help you reach your retirement goals. Our investment calculator forecasts the size of your portfolio based on your starting point, contributions, rates of return, and timeframe.
Working with a financial advisor can help you create a personalized plan to meet your goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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