The Retirement Outlook for Generation Xers
Eileen St. Pierre, The Everyday Financial Planner
“Wild, Crazy and Alive – We’re the Class of ‘85” was our motto for my high school graduating class. I can’t remember if I voted for it – I definitely did not vote to have a smurf as our class mascot. But I was outnumbered and had to settle for a powder blue T-shirt that I remember wearing just once. From my headband down to my legwarmers, I am proud to be a Generation Xer, those of us born between 1966 and 1975.
The Pew Charitable Trusts recently published the study Retirement Security Across Generations: Are Americans Prepared for their Golden Years? that examined how the recent recession affected the wealth of different generations, from Depression-era babies (ages 78 to 87) down to Gen Xers (ages 38 to 47). The study concluded that my generation was the most likely to experience downward mobility in retirement. This means that we’re not going to do as well in retirement as members of previous generations.
John Kiernan, Editor of CardHub®, recently interviewed me and several other experts for our opinions on this study for his article Ask the Experts: Will We Ever Get To Retire. Here is the transcript of our interview:
Studies show the median Gen. Xer’s net worth fell by about 45% between 2007 and 2010; is the generation’s poor retirement outlook mainly attributable to the recession putting them behind the eight ball or is something else (e.g. a lack of financial literacy) the problem?
The recession certainly hasn’t helped, but this generation was in trouble before the recession hit. They have more debt than the earlier cohorts so making debt payments takes priority over saving for retirement. Gen Xers are now at the age when they are starting to realize they are “behind the eight ball.” I don’t think a lot of them really understand basic retirement planning. More of them, as compared with the earlier cohorts, are being forced to take a bigger role in their retirement planning as employers shift away from pensions to defined contribution plans. When I talk to people (not just members of this generation), they really do not understand their retirement plans. It is very common for them to have never accessed their accounts online and updated their asset allocation percentages. They have no idea how their retirement funds are invested. So yes, I think lack of financial literacy is a problem. You can ask them to view a webinar or go through an online module (offered by many corporate 401k providers), but they really need to be taught the basics, preferably face-to-face.
This seems like a giant problem waiting to happen; will we need to alter retirement policy to compensate? If so, what changes will be necessary?
As a financial educator, I am not surprised to see this problem happen. You just can’t expect regular people to take over planning for retirement when their parents’ employers used to do it for them via a pension. One major step forward in retirement policy was using life cycle or target date funds as the default investment in defined contribution plans. While some may argue that many of these funds expose investors to too much equity risk (particularly those nearing retirement as we saw during the recession), at least these portfolios are growing and beating inflation (as opposed to the prior default investment – money market funds). Many retirement plan providers offer automatic portfolio re-balancing but investors need to be educated on how this process works. I would like to see retirement plan participation mandatory just like paying Social Security taxes.
[In the May/June 2013 Financial Analysts Journal, Professor Meir Statman from Santa Clara University proposes a mandatory retirement savings plan.]
Another problem waiting to happen is how to withdraw money in retirement. I would like to see plan providers be required to offer an annuity option. I know there are some who don’t like annuities because of the fees and surrender charges, but in principle this option would make drawing down retirement portfolios a lot simpler for the general public.
Were Gen. Xers’ fates sealed by the recession or is there time to turn things around? If so, how?
I’m a Gen Xer so I’m not writing off my generation just yet. We have time to catch up, but we need to get serious about this retirement thing. The recession has made an impact on people in a positive way, helping them see the pitfalls of taking on too much debt. What remains to be seen is if this will result in permanent behavior change. We need to save as much as we can for retirement – aim for 20% of your income. Make sure you are capturing all the tax benefits of retirement saving and any benefits your employer offers such as matching a portion of your contributions. Make sure you take on enough risk to beat inflation and rising health care costs. Once you hit age 50, take advantage of catch-up contributions.
What’s the prognosis for future generations?
I’m more worried about future generations. Young people just don’t see the need to save for retirement. Job opportunities that lead to upward mobility and increased salaries that enable them to save are getting harder to find.
I try to show them the power of compounding. Many of the younger generations don’t remember how the markets did before the recession – they just remember how the stock market tanked when the housing market collapsed. So I show them using numbers that if they start saving early, they will not have to take on as much risk as someone, say a Gen Xer, who starting saving much later. But they will have a larger retirement portfolio than the Gen Xer simply because of the time factor. The trick is finding a creative way to get this message across. Putting the numbers on a PPT slide just is not going to be enough anymore.