The Gen X Guide to Retirement Planning

The Gen X Guide to Retirement Planning

Falling between the larger Baby Boomer and Millennial generations, Gen X members now find themselves at a critical juncture with regard to retirement planning. While they may still have another decade or two until it arrives, they can at least see it looming in the headlights. Unlike Baby Boomers, who are in or just about to enter retirement, Gen Xers have a fair amount of time to prepare for its arrival – time they must put to good use to maximize their chances of retiring well.

Sometimes called the sandwich generation, reflecting that many Gen Xers – those born between 1967 and 1987 – find themselves both raising children and dealing with the needs of aging parents, members of this generation are now at a point where retirement planning is a must if they hope to achieve their desired retirement lifestyle. If you are a member of Gen X, now is the time to either review your existing retirement plan or create one if you have not already done so. 

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When creating a retirement plan, there are a variety of factors to consider. Evaluating these factors will help you make decisions as to how much money you should be setting aside for retirement, what accounts you should be using to hold the money you set aside, and how you should be investing your retirement savings. All of these are crucial decisions that play a big part in determining whether you can achieve your retirement savings objectives. The creation of an overall financial plan connects these different planning aspects to provide you with a blueprint designed to help generate sufficient savings to adequately fund your retirement


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Chapter 1

Financial Freedom with a Comprehensive Financial Plan

Planning for retirement can be a stressful process. It involves a number of moving pieces (calculating income, expenses, savings needs for other goals, projected retirement expenses, etc.), which can lead to procrastination. Some people get so intimidated by the task that they put off doing what they need to do now to secure their future standard of living. 

Instead of stressing out over retirement, get organized and confident by creating a plan!

One of the primary reasons people fall short of reaching their retirement savings objectives is a failure to put in the time and effort necessary, either on their own or with the assistance of a financial advisor, to create a comprehensive financial plan. To boost your chances of being able to live the lifestyle you want to live in your golden years, developing such a plan is the first step on the road to financial freedom.

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Learn The Top 5 New Year Financial Resolutions for Gen X in 2021

Financial freedom is different from retirement in that the term acknowledges that some people prefer to continue working past retirement age even if they don’t need to. Financial freedom refers to the fact that these individuals choose to work but have amassed enough retirement savings that they could stop working any time they wanted. 

Whether your goal is retirement or financial freedom, a comprehensive financial plan can help you get there. Such plans typically include the following items:

  • Projected savings needed to fund goals such as retirement, purchasing a home and education funding
  • An analysis of your current and projected income and expenses so you can determine how much you can set aside in savings to fund your goals
  • An action plan for funding your goals that details the amounts to be set aside and the type of accounts those funds will be placed in
  • An insurance analysis that examines how life or disability insurance could be used to help secure your financial future
  • Analysis of your projected health care coverage including Medicare and any private health insurance policies
  • An investment plan that details how your savings will be invested
  • A retirement income plan that outlines expected expenses and the timing and sources of your retirement income optimized for tax consequences 
  • Estate planning instructions detailing how you would like any remaining assets distributed

Read our blog article: Top 3 Gen X Retirement Planning Tips

Chapter 2

Is It Too Late to Start Now?

Generation X members who have not yet started to seriously plan for retirement may wonder if it is too late for them to create a comprehensive financial plan that incorporates retirement planning. With 34% of the generation having no retirement savings at all, according to an article in CPA Practice Advisor, this is a pressing issue for many Gen Xers.

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The answer to the question of whether it is too late to start now is definitely NO. While the sooner you get started planning for retirement the better, there are still many things you can do to prepare yourself for retirement even late in your career. For instance, IRS laws with regard to contributions to 401ks and IRAs allow people 50 years and older to make “catch-up” contributions in excess of the standard maximum contributions to these plans.

There are other steps you can take to prepare for retirement late in your career as well. These include cutting expenses to boost the funds you can set aside for the purpose, whether by reducing the amount you spend on discretionary purchases or taking more dramatic steps such as downsizing your personal residence or moving to a locale with lower living expenses.

The key insight for those Gen Xers who have delayed their retirement planning is that they should avoid any further delays in creating and implementing a plan. Even if the sums you are able to set aside for retirement currently seem modest, the power of compounding can help them grow significantly over time. With people living longer than ever these days, this means that funds you save for retirement now may have many years to compound in value before you use them, depending on your financial situation and retirement income requirements.

Given the importance of planning to successfully reach a person’s retirement savings objectives, the question arises: why have so many Gen Xers not taken the steps necessary to prepare themselves for retirement? The answer is that there are a number of roadblocks that can make it difficult to complete and act upon the planning process.

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Find out more in our blog article:

Is it Too Late to Start Saving for Retirement?

Chapter 3

Roadblocks on the Path to Retirement

Reaching financial freedom or retirement can be a challenging task. In many cases, to get there you must overcome a number of obstacles standing between you and retirement/financial freedom. Some of these potential roadblocks include:

Impact of the Great Recession: Some investors and financial analysts make the mistake of projecting past stock market performance into the future in a straight line. In reality, while the equity markets have delivered above-average returns over the long-term, they have encountered a number of hiccups along the way. If a severe bear market such as the one that accompanied the Great Recession of 2008/09 occurs just before or within a few years of when you plan to retire, it can negatively impact your plans. Such a scenario could cause you to reduce the income you take from your retirement savings until the market recovers or, in some cases, delay your retirement.

For Gen X investors, the Great Recession may have caused them to reevaluate their retirement plans due to poor investment performance or changes in their career prospects. Even for those who saw their investment portfolios eventually recover from the market downturn after the Great Recession, the potential that another such crash could occur again must be considered. The recent market slump caused by the coronavirus is an example of this. Even though the market has recovered the largest portion of its losses, it is only prudent to take into account the potential that it could plunge again at some point.

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Read our blog article: Gen X, the Pandemic and Retirement Planning

A false sense of security regarding Social Security: According to CPA Practice Advisor, 29% of Gen X members expect to be able to live off their Social Security benefits. However, financial experts have pointed out for many years that the Social Security Trust fund is rapidly depleting its balances. While this does not necessarily mean that payments will stop when this happens, they certainly could be reduced. Even if that doesn’t happen, at an average of around $1,422 per month, the typical Social Security payment will not be sufficient for most people to subsist on.  

Leading a busy life that pulls a person in multiple directions: For some Gen Xers, the many demands of their life, including work, family, entertainment, friends etc. takes up a tremendous amount of time. For those in this position, the issue is not whether they want to plan for retirement, it is whether they can find the time to do so. If you are too busy to take the necessary steps to plan for retirement, one option is to work with a financial advisor as a way to build a plan without having to do all the work yourself.

Struggling with daily financial stress: The concept of setting aside money for long-term goals such as retirement may sound good in principle but prove difficult to achieve in the moment for those who face daily financial challenges. For instance, one Fidelity study found that 70% of Gen Xers have less than six months of emergency savings. While paying essential expenses must take priority over setting aside savings for goals such as retirement, by taking a hard look at your budget you may find that there are ways to squeeze out savings. If this is the case, don’t let short-term financial challenges distract you from the goal of funding longer-term objectives.

Chapter 4

Max out Retirement Plan Contributions and Other Planning Tips

As Gen Xers move ever closer to retirement, a crucial step they can take to build an adequate retirement war chest is to max out their retirement plan contributions. Even if you don’t put aside the absolute maximum allowed, the idea is to contribute as much as you can possibly afford to do so. As previously mentioned, those 50 and older can put aside additional catch-up amounts – for 2020, $6,500 above and beyond the standard the 401k contribution limit of $19,500 and $1,000 above the standard IRA contribution limit of 6,000. 

The logic behind taking such an approach is clear. As members of Gen X increasingly enter the retirement home stretch, the time is now to exert your best efforts to maximize your savings to put yourself in a position to reach your retirement goals. Gen Xers are in many cases at the peak of their careers and earning power. Thus, setting aside as much money as possible may be easier to do than earlier in your career. Additionally, while many Gen Xers are still raising children and some are also helping their elderly parents, others are empty nesters and thus have more disposable income to set aside for retirement than might have been the case in the past.

Other strategies you can use to prepare for retirement include:

  • Lower your taxes: Structure your finances so you pay as little to the IRS as possible. Every dollar you don’t pay in taxes is a dollar you can invest for retirement.
  • Reduce interest rates on debt: With interest rates just about as low as they have ever been, now is the time to replace any high-interest rate debt you are paying on car loans credit cards, etc. with lower rate debt where possible. 
  • Look into tax-free retirement options: If you are contributing to an IRA, it makes sense to consider setting up a Roth IRA. Although Roth contributions are not tax-deductible, funds in these accounts grow tax-free and are not taxable when withdrawn. Having a Roth IRA account can help you sequence your retirement income withdrawals for maximum tax benefit if you are in one of the higher tax brackets.

Consider contributing to an HSA plan: HSA plans help you save for healthcare costs you may incur in retirement. They feature tax-deductible contributions, grow tax-free and funds can be withdrawn tax-free for qualified medical expenses.

work and retire signs

Chapter 5

Benefits of working with a fiduciary CFP®

Gen X members who choose to work with a financial advisor in the planning process can benefit from working with a CFP®. There are a number of reasons for this. First, to gain licensing as a CFP®, an advisor must study for and pass a comprehensive series of tests demonstrating their knowledge of all aspects of the financial planning process. Additionally, CFP®s must adhere to the high ethical standards required by the CFP® board of all planners who qualify for the designation. 

In addition to the rigorous qualifications required of a CERTIFIED FINANCIAL PLANNER™ professional by the CFP® board, investors can benefit from working with CFP®s who are considered fiduciaries. Fiduciary CFP®s are required to place their clients’ best interests first when offering advice. This contrasts with the less stringent “suitability” standard that has typically applied to most stockbrokers or registered representatives. The suitability standard is often seen as less strict because it only requires an advisor to recommend investments that are “suitable” for their clients, a vague term that is not as well-defined as the “best interests” standard required of fiduciaries.

The suitability standard often applies to financial advisors who sell various financial products without necessarily focusing on what works best for you in the context of your overall financial circumstances. A fiduciary CFP® can help you avoid this type of product-based investment approach and select investments based on what is best for you given your financial situation and investment objectives.

There is a new SEC rule that will go into effect 6/30/20 called “Regulation Best Interest (Reg BI)”. This rule will make it more imperative that you ask your financial advisor “Are you a fiduciary?” and “Are you legally required to act as a fiduciary in my best interest?‘” Instead of “Are you acting in my best interest?”.

Chapter 6

Benefits of Fee-Only Financial Planning

Fiduciary financial planners typically offer their clients services on a fee-only basis, rather than charging commissions. This helps avoid the conflict of interest that can arise when advisors charge commissions. In such cases, an advisor or stockbroker can increase their compensation by making more trades in a client’s account, whether or not those trades are in the client’s best interest. By charging fees, this conflict of interest is eliminated.

Fee-only advisors typically charge fees on a per hour or per project basis or as a percentage of assets under management (AUM). In all of these cases, there is no incentive for the advisor to make trades in a client’s account to boost compensation. Instead, the advisor is incentivized to provide excellent advice, as this is the best way for an advisor to earn more business from existing clients and generate referrals. 

In the case of hourly or per project billing, the client can judge whether the advice was worth what they paid before deciding whether to continue to work with the advisor. For advisors who charge based on AUM, their compensation rises as their clients’ assets increase in value, putting them on the same side of the table as their clients by aligning both parties’ objectives.


Chapter 7

Manage Your Retirement Assets with a Comprehensive Financial Plan

The performance of your investments plays a big part in achieving your retirement savings objectives. Because of this, it is vital that your retirement assets are managed, either by you or your financial advisor, in accordance with your retirement plan.

Taking this approach is important because it helps you avoid making poor investment decisions based on short-term considerations. It also helps you follow investment principles such as staying diversified with your investments and rebalancing your portfolio when necessary.

Investing for retirement typically relies on using the growth power of equity (stock market) investments for some portion of your retirement assets. While equities typically have outperformed most other investments over long periods of time, they can be volatile in the short term. This is why it is important to have a plan for using equity assets to fund your retirement objectives. Your comprehensive plan should detail the proportion of your retirement savings you will invest in equities and other asset classes such as fixed income, real estate, etc. 

Your plan should also take into account the need to change your investment allocation as you get closer to and enter into retirement. As you near retirement, it is generally advisable to take a more conservative posture with your investments. The reason for this is simple: there is less time for your assets to recover from a market crash when you are further along in life than when you are just starting your career. This is especially important for Gen X investors, many of whom are now starting to see the retirement light at the end of the tunnel.

Read our blog article: Financial Planning Made Easy for Gen X

Chapter 8

Putting it all Together

Gen X members are in many cases near or at the peak of their earnings power. At the same time, with retirement no longer looming far off in the distance, taking serious steps to achieve your retirement savings objectives if you have not previously done so – and evaluating your progress in that direction to make sure you are on the right track if you have – is called for to improve your chances of living the retirement lifestyle of your choice. 

This retirement guide can help you with either task by getting you to think about the primary factors involved in planning for retirement. You can use it to devise a retirement plan on your own or in consultation with a financial advisor who is helping you draw up a plan.

Besides the technical details of putting together your retirement plan, the motivational details are important to get right as well. As discussed in this report, distractions, whether financial or otherwise, can cause delays in planning that may harm your chances of being able to attain your retirement goals. Don’t let your busy life prevent you from taking the steps you need to take to realize your preferred retirement lifestyle. Make planning and preparing for retirement a priority so you can reap the benefits of planning ahead and fully enjoy the retirement – or financial freedom – phase of your life.

At Sapiat Asset Management, we use a unique, personalized process to identify the needs of our clients. We are with you every step of the way. Contact us today for a complimentary consultation.

Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.

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