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Gen X has long been overlooked. For what reasons, I’ll never know and I’m part of this generation. More recently, however, increasing amounts of attention have been paid to the retirement planning and savings woes faced by people born between 1965 and 1980.
That’s right. The oldest Gen Xers are rapidly closing in on being 60, meaning traditional retirement age and the earliest age at which to claim Social Security benefits are right around the corner. Unfortunately, data confirm that many Gen Xers aren’t anywhere close to being retirement ready. That scenario highlights the need for advisors.
It’s a two-way street. Various surveys and studies indicate Gen Xers haven’t hired advisors in comparable fashion to their baby boomer counterparts. Likewise, perhaps due in part to industry “programming,” advisors haven’t focused as much on Gen X as they have on boomers and millennials. Both situations need to change and advisors can encourage those shifts by tailoring retirement-enhancing strategies to Gen X prospects and clients.
401(k) Support Good Place to Start
With Gen X and retirement planning, a pivotal place to start is with employer-sponsored retirement plans, which are likely 401(k)s because Gen X is the first generation that, broadly speaking, didn’t have the backstop of defined benefit pensions.
The opportunity for advisors is to help 401(k)-dependent Gen X clients strategize to ratchet up their contributions because even 10% of salary saved can make a substantial long-term difference.
“Simply saving a consistent percentage of salary and taking advantage of compounding from age 50 to age 65 can get investors closer to the type of portfolio balance they might need to cover spending during retirement,” notes Morningstar’s Amy Arnott. “Assuming the market performed in line with my assumptions, the hypothetical investor would end up with a portfolio balance of about $460,000 at age 65.”
Those assumptions are based on 50-year-old earning $75,000 annually with $93,000 in a 401(k) and 6% annual market returns. Advisors should articulate to Gen X clients that if they can contribute 15% off their salaries to 401(k) plans, the $465,000 mentioned above swells to $570,000.
For clients over 50, the “catch-up” provision needs to be tapped, but many folks aren’t aware of this benefit. That’s one more reason clients of all ages should discuss their 401(k)’s with advisors.
“Retirement savers who are age 50 and over can contribute an additional $7,500 in annual ‘catch-up’ contributions, which can go a long way toward closing any retirement savings shortfalls,” adds Arnott. “Assuming market returns of 6% per year, savers following this strategy would end up with about $1,066,000 at age 65. As in the previous example, the surplus portfolio balance could be used in a variety of ways.”
The Inheritance Wild Card
For all the attention paid to the great wealth transfer, Gen X often gets lost in that shuffle, which is odd because that cohort will be the first to inherit boomer wealth.
That is to say some Gen Xers, even those that aren’t well-prepared for retirement today, will enjoy a backstop of assorts from their parents. That’s assuming the adult children have strong relationships with their parents and proper estate planning has been conducted. It’s a point worth addressing Gen X clients. Some may be overestimating what their inheritances will be. Others may be getting nothing at all.
Point is regardless of what the inheritance picture looks like, Gen Xers should be taking steps to shore up their retirement savings on their own and with the help of advisors – not relying on the generosity of mom and dad.