Financial Advice for the Youngest Baby Boomers

According to a Transamerica Center for Retirement Study annual survey, forty-two percent of baby boomers, the youngest of whom turn 50 this year, have less than $100,000 in retirement accounts.

Those boomers celebrating their 50th birthdays this year are realizing their golden years are not too far away and it is time to get serious about retirement planning.

Craig Brimhall, Vice President of Retirement Wealth Strategies at Ameriprise offered the following tips on what boomers turning 50 need to start doing this year to ensure they have a financially secure retirement.

Boomer:  At age 50 what catch up contribution rules apply to my IRA and 401K savings?

Brimhall:  You may make additional contributions to a retirement plan if you are 50 or older. IRAs (and Roth IRAs) have a regular limit of an annual contribution of $5,500 and the catch up contribution is $1,000, so the annual limit for those over 50 is $6,500. All retirement plans have “catch up” provisions and those numbers vary by plan type. But it’s important to remember that if you are eligible to contribute to an IRA (and your contribution may or may not be deductible, depending on your income), you can contribute that $6,500 to a regular IRA, a Roth IRA, or some combination of each type. However you may not contribute more than the total limit when you add them all up.

Boomer:  How important is it for me to pay down my debt and in what ways can I speed up the process?

Brimhall:  Whether or not you are comfortable carrying debt into retirement is a personal decision – some people are determined to retire debt-free while others may plan to have a cash flow and budget that accounts for debt after they leave the workforce.

For those who want to eliminate a mortgage or a large loan, a simple way to accelerate your debt-free day is to pre-pay a little extra to the principal amount whenever possible. Though they’re quite rare, first, check to see if you are subject to pre-payment penalties. If you will not receive a penalty for pre-paying, consider simply following your amortization schedule and make an extra payment to the principal each period with your regular payment. This technique may significantly reduce the life of the loan, though if you wait until later in the life of the loan, you will notice that most of the payment goes to reducing principal and this idea may be less appealing.

Boomer:  If I do not have a life insurance policy when I turn 50, what type of life coverage should I be looking at?  If I do have life insurance should I be making any changes to the policy?

Brimhall:  Life insurance, even at age 50, can have very legitimate purposes like debt elimination for your family and funding of future expenses they may have (such as college). It’s common knowledge that the older a person gets, the more expensive life insurance can become. However, as average lifespans continue to grow longer, you may be surprised at the affordability of life insurance even at 50 and beyond.

There are different kinds of life insurance. A term life insurance policy may be suitable if you only want the coverage for a certain amount of time (a term of years) until certain expenses or obligations disappear. There are several types of term life options, but in short, a level term policy generally means level coverage but possibly increasing premiums as you age. Decreasing term generally means a fixed premium and reducing coverage, which may be a good fit if debts or obligations are decreasing as well.

While they can be more costly, a universal (or whole) life plan may be beneficial if you also want to put a significant amount of money away into the cash value as a form of tax-deferred savings.  In this way, the policy can do double duty by providing a tax-free death benefit for heirs and also provide a tax-deferred savings or investment vehicle from which you may be able to withdraw tax-free amounts later during retirement.

If you already have an insurance policy, you may want to see what options you have as you age. Depending on what type of plan you have, you may need to replace it or you may be able to make changes to it without replacing it. As an example, a universal policy may offer you the option of reducing the death benefit (assuming your needs for the coverage have decreased over the years) and pump up the cash values with additional contributions to use as income later.

Boomer:  What other insurance coverages would you recommend I look into?

Brimhall:  While you are in your working years, your risk of having a disability lasting 90 days or longer is actually quite high. According to the Social Security Administration, 1 out of 4 people will experience a long-term disability during their working years. The chance of disability is actually higher than death at all ages during working years and for a 50 year old, the risk of disability is 1.8 times higher than death*.

So, a long-term disability plan may be as important as life insurance. And, as you age, the concept of disability evolves into the chance of needing long-term medical care. The chance of needing long-term care assistance before the end of life is about 70% for those who are now age 65.** So if you haven’t already, you may also want to consider long-term care insurance.

(*the Society of Actuaries)

(**US Dept of Health and Human Services )

Boomer:  Is turning 50 a good time to diversify my portfolio?

Brimhall:  Any time is a good time to diversify, depending on your risk tolerance. Remember that diversification is a technique to try to reduce volatility, not enhance returns. It may give you a better return, but diversification should be primarily thought of as a risk management tool, especially as you age. As you near retirement, you may want to try to reduce volatility and go for “good returns over time” versus trying to “hit the ball out of the park.”