7 pitfalls retiring baby boomers must avoid

By Liz Pulliam Weston

As baby boomers near their retirement years they're discovering what previous retirees have been complaining about for years.

There's lots of information on how to plan for retirement, but not nearly enough on how to plan retirement itself.

The stakes are perilously high. Errors made in the years surrounding retirement can haunt you for life. You can end up with less money, or less retirement, than you'd planned. Or you can face big tax bills that could have been avoided had you known better.

Here, according to retirement income experts, are some of the most common mistakes and how to avoid them:

Underestimating your life expectancy

Financial planners used to routinely create retirement plans that stopped at age 85, because the chances seemed pretty good their clients would be dead by then. (The average life expectancy at age 65 is 10.3 years for men, 12.4 years for women.)

But averages don't tell the tale. You may be in better health than the average Joe or Jane, take better care of yourself or have better genes. Even if you don't, your spouse might; Fidelity Investments has found that the chances of one member of a couple living past 90 are about 50%.

So now more planners are using 90 or 95 as the projected age of death, and you might want to project even longer: MSN Money's Life Expectancy Calculator can help.

By the way, the longer you live, the more you'll benefit from delaying the start of your Social Security checks. Although you can start receiving checks as early as age 62, the amount of your checks increases the longer you wait, up until age 70. An analysis by T. Rowe Price financial planner Christine Fahlund found that if you expect to live until at least 80, you'd be better off waiting until after age 65 to start drawing benefits.

Assuming you'll be able to work as long as you want

The baby boomers are famous for proclaiming that they'll work past retirement age; an AARP study last year found 79% predicted they would continue working at least part of the time during their retirement years.

How they'll actually feel once they're in their 60s and 70s, though, is an open question. Right now, the typical retirement age is 62, according to the Employee Benefit Research Institute, and 40% of retirees say they left the workplace earlier than they'd planned, often because of illness, disability or layoffs.

In fact, 42% of women over 65 and 38% of men in the same age group have disabilities, according to the U.S. Census Bureau. Only 12% of people over 65 are still in the work force (16.9% of men, 8.9% of women).

Many people find that even without chronic health problems, their energy begins declining in their late 60s and 70s, although a few are able to work into their 80s or even 90s.

So if you're counting on part-time work to supplement your retirement income, don't count on it for long. You may be the exception, but it's smart to plan as if your working years won't continue indefinitely.

Failing to factor in health-care costs

I've heard from folks who didn't bother to check health-care premiums until after they took early retirement -- and then were stunned by the four-figure monthly premiums they were asked to pay.

Employers increasingly are eliminating retiree health coverage, and you can't get Medicare coverage until you're 65. Even then, there are plenty of costs the government program doesn't cover. Fidelity projects the average couple will need nearly $200,000 at regular retirement age just to pay for out-of-pocket medical costs for the rest of their lives.

Long-term care costs can be particularly devastating. A 65-year-old man faces a 27% chance of needing long-term care, said actuarial expert Christopher Raham, while the same age woman has a 32% chance.

"Together, a couple has a 50% chance of having a long-term care 'event'," said Raham, a senior actuarial adviser for Ernst & Young in Atlanta and head of the company's retirement income innovation team. "And the average cost is about $150,000."

Buying long-term care insurance in your 50s or 60s can help you cover the expense if you can't "self insure" by building up a sufficient nest egg.

If you plan to retire before you qualify for Medicare, make sure you investigate your private health insurance options and have enough income to pay the premiums. If you don't, you might want to delay retirement a few more years until you do.

Locking in poor returns

There are a number of ways retirees can do this, but two of the most common are certificates of deposit and immediate annuities.

CDs typically offer interest rates that aren't much higher than the rate of inflation. Add in taxes, and you're often losing purchasing power. While CDs can be a part of your investment strategy in retirement, most retirees will need the long-term growth offered by stocks and stock mutual funds. The proportion of your portfolio that should be in stocks depends on your age, your risk tolerance and your growth needs, but many planners say the minimum for most people should be 50%.

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