Steps Baby Boomers Need to Take Before Retirement

It's never too late to review retirement plans

Retired baby boomers sitting on a front porch
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Johnny Greig / iStock

If you are a Baby Boomer, the retirement challenges that are just around the corner may seem a bit overwhelming. While it’s never too late to plan, the reality is that Baby Boomers don’t have as much time as younger generations to close the retirement preparedness gap.

If you are a Baby Boomer thinking about your retirement prospects, here are some important steps you can take.

Create a Personal Spending Plan

Budgeting has a bad reputation because most people find it hard to monitor their spending and make adjustments consistently. If you are a Baby Boomer approaching retirement, you should create a proactive spending plan that tells you where your money should go in advance to ensure your spending aligns with your goals. 

There are many reasons why you should create a spending plan. Most importantly, it helps you avoid spending more than you have coming in.

Your retirement calculations are really only ballpark estimates until you take the time to truly understand where your money is going. Being aware of your current spending provides some useful information to help you see how your retirement income plan really looks.

Spending plans also help free up extra money to pay down debt. You can tailor your plan to help identify extra funds for maxing out a tax-advantaged account like a 401(k), IRA, or HSA. Perhaps the biggest benefit of creating a budget or spending plan during the late-career stage is the awareness of how much income you'll need to do the things you want to do in retirement.

Prioritize Your Financial Goals

The best way to prioritize your financial life goals is to take stock of what you have and need, create a plan, and put it in writing. Sit down with your spouse or partner and discuss your short and long-term financial goals. It helps to make a list of the financial requirements you anticipate having during your retirement. Some of the items you'll need to plan for are:

  • Medical care and expenses
  • Vacations or travel
  • Transportation
  • Everyday living expenses

Many people want to help out their children and grandchildren as much as possible. However, before setting aside funds to help your descendants, make sure you have enough to finance your life. If you don't, you risk placing the financial burden of your later years on the shoulders of your children.

Evaluate Your Health Insurance Options

Health care costs are one of the biggest retirement planning concerns. It should be at the top of your list as your retirement nears. From a budgeting standpoint, health-related costs will amount to a significant portion of your spending.

If you have retiree medical insurance, start reviewing your options and the associated costs as soon as possible. You can visit the Healthcare.gov website if you will be retiring before age 65 (when you become eligible for Medicare ). If you have a high-deductible health plan with an HSA option, take full advantage of it.

To do this, you set aside up to $3,650 for individual coverage or $7,300 for family coverage (plus $1,000 for both if aged 55 or older) in an HSA from pre-tax dollars for the 2022 tax year to help cover future medical care costs.

Plan for Potential Long-Term Care Expenses

Long-term care costs can be a significant drain on your retirement nest egg. You can save enough to retire comfortably, only to see it disappear after just a few years of long-term care expenses.

According to Genworth, the median annual cost in 2020 for a private room in a nursing home was $105,850. To live in an assisted living facility, the median annual cost in 2020 was $51,600. The median annual cost in 2020 for a home health aide was $54,912.

You should assume that you're going to need some form of long-term care in your older years and plan for it. This could also mean moving closer to family, downsizing, or even moving in with them to reduce expenses.

A 2019 report from the Department of Health and Human Services found 70% of 65-year-olds will need some form of long-term care. The Alzheimer’s Association has projected the cost of dementia in 2021 to be $355 billion—costs are expected to exceed $1.1 trillion by 2050.

When you're thinking about paying for long-term care, you should know that Medicare doesn’t cover long-term care expenses. In general, Medicaid does, but it requires you to spend down nearly all of your assets to qualify. There is also a five-year look-back period on assets that you've gifted to others.

Your options then are to pay out of pocket using your retirement nest egg, spend down assets to qualify for Medicaid, or purchase long-term care insurance. You can learn more about long-term care insurance using resources and information found at the federal government's website, LongTermCare.gov.

Here are a few guidelines to help you choose the best way to pay for any future long-term care related expenses:

  • If you anticipate your retirement assets will be somewhere between $200,000 to $3 million, you may want to consider purchasing long-term care insurance coverage.
  • Check to see if your state offers a long-term care partnership program. Purchasing qualified insurance means that each dollar the policy pays for your long-term care, one dollar from Medicaid's asset limit is protected.

Review Your Investment Portfolio on a Regular Basis

The "set it and forget it" approach to investing for retirement may not hurt you as much in the early stages of your career. However, your time horizon shortens as retirement approaches—you have less time to recover from a big loss than you did when you were younger. A 2017 generational research report from Financial Finesse found that 40%-42% of Boomers had 15% or more of their portfolio in one stock.

A general rule of thumb is to reallocate your portfolio as you age, moving from a majority of interest-earning assets when you're young to a majority of income assets when you're older. For example, you could switch the majority of your portfolio from stocks to bonds or Treasuries.

You should consider diversifying your retirement investments if you currently have more than 10%-15% in one stock. Individual company stocks have significant upside potential, but they can also experience large declines. This is especially risky since you could be out of work at the same time that your savings are reduced.

Ensure your overall investment portfolio is allocated appropriately between different asset classes like stocks, bonds, real estate, and cash. One of the simplest ways to diversify your retirement investments is by using a balanced fund or a target-date retirement fund.

Estimate Your Money Requirements

Running a basic retirement needs evaluation at least once per year is a good financial planning activity. Looking over your needs annually helps ensure you're on the right track with your finances. You and your partner or spouse may have changed retirement plans, or other circumstances might have changed, so revisiting your plan every year helps address any changes. 

If you're finding it challenging to stay on top of your plan or you're not confident enough in your financial abilities, find a reputable financial advisor that can help you.

Decide How Much Income You Need

The best approach is to decide whether you want to maintain your existing standard of living or want it higher or lower when you retire. If you have five years or less until you want to retire, you should complete an actual budget for your retirement.

Otherwise, the general guidance is to initially target a 70% to 90% income replacement rate. You can always adjust this up or down depending on the lifestyle you want. The most important thing to do is estimate whether or not you will have enough income from all of your sources to keep your financial independence. You can use one of several online calculators to help—the odds are that your retirement plan has a built-in calculator or an option within the plan thats adjusts your investments as you age.