We’ve been focussing on the “senior bust” that many baby boomers will face as they approach retirement.
So how can baby boomers avoid the senior bust?
The starting point is to understand your finances. You’ll need to know your current assets and have a good idea of how much you’ll need to live off during retirement. Assuming your current retirement is not adequate, you’ll need to save more and invest wisely.
Some alternatives include:
Delay retirement. The longer you work, of course, the more you can save and the longer it will be before you need to draw off of your retirement funds. Assuming your children are grown and your expenses are minimal, you can probably save a great deal more for retirement than you could when you were younger.
Delay Social Security. Annual cost-of-living increases are calculated using the initial year’s Social Security income as a base, so delaying the start of Social Security for even a few years can raise annual income significantly. While individuals are eligible for Social Security at age 62, they must wait until age 65 if they want “full” benefits (67 for those born in 1960 or later) and age 70 if they want “delayed” benefits.
Manage risk. Keep in mind that what your investments earn from day to day or even year to year is not nearly as important as what they earn long term. Most investors concentrate on short-term returns and don’t spend enough time focusing on avoiding losses.
An investor or investment manager can do much to avoid risk, without sacrificing growth. A few examples include:
- Diversify. Virtually anyone who manages investments recommends that investors invest in a mix of many different types of investments. For example, the stock portion of an investor’s portfolio may include growth and value stocks; small-cap, mid-cap and large-cap stocks, and international and domestic stocks.
- Pay attention to the market. Using technical as well as fundamental analysis can alert investment managers about potential market changes. Adjusting your portfolio based on these potential changes can help minimize losses.
- Use stop losses. Stop losses are used to automatically sell securities when they drop to a certain price. This allows investors to avoid potentially large losses.
- Consider convertibles. Convertible securities combine features of both stocks and bonds. The income they produce provides downside protection. In addition, they are typically not as volatile as stocks.
Of course, among the worst mistake investors can make is to sell their stocks when the market is bottoming out. “Selling low” is also among the most common mistakes investors make. Those who sold a year ago because they couldn’t tolerate any more losses should learn from their mistake and hopefully will avoid selling at the tail end of the next bear market.