Generation X and Financial Planning

Financial planning is important for every generational cohort, from the Greatest Generation (your grandparents) to Generation Z (those in their teens and 20s now). But it may be particularly important for Gen X’ers because they have faced economic headwinds their parents didn’t.

The economy was shaky when part of Generation X was in high school, with very high interest rates and unemployment. A stock market crash occurred during their college years. To some degree, there have been several periods of poor and uncertain economic times during the years when Gen X’ers entered the workforce that for some, may continue to exert negative effects long term.

In addition, Generation X does not enjoy the financial cushions past generations did. Pensions, once the mainstay of middle-class retirement, began to be phased out during the 1980s. People are thus far less likely to have a pension than their parents or grandparents – their retirement security is more up to them.

At the same time, the cost of living in important categories has risen. College is far more expensive than it was once. Generation X may have college debt themselves – and may also be paying their children’s high college expenses as well. Real estate in many areas of the U.S. is far more expensive than it was once and may take up a larger chunk of disposable income.

Finally, many Gen X’ers feel that Social Security for their retirement is not entirely secure. They may also not be sure what income they will need in retirement, so feel anxiety about whether they will have a comfortable retirement and perhaps unclarity about when, or if, they can stop working.

Read our blog article: How to Balance YOLO With a Comprehensive Financial Plan

So what does financial planning for Generation X look like? 

Financial planning for everyone is designed to cover individual and family needs and achieve your goals. Financial planning for Generation X is no different. 

Everyone’s needs and goals are different. There is no cookie-cutter financial plan. That is why sitting down with an advisor who reviews your situation, such as your assets, income, and debts is important. The financial advisor will discuss your specific goals as well, and come up with a plan to meet them.

If you’ve given no thought to financial planning previously, it’s not too late to start a plan now. The oldest Gen X’ers are a little more than a decade from retirement. There’s still time to save for a comfortable retirement, but it’s crucial to start now. 

If you’ve worked with a financial plan previously, a financial advisor in midlife can tune it up and monitor it going forward, to make sure that you maximize the achievement of your goals.

Financial planning can begin when you first have income and assets of your own. All spending and saving is a form of financial planning, whether people realize it or not. If you don’t actively and directly plan, your income and spending habits form a plan by default.

That said, many people don’t have an active financial plan. Others may plan for specific goals, such as a second home or children’s college education. If you’re entirely new to financial planning and how it can help, you’re not alone.

The most advantageous kind of financial planning is a comprehensive financial plan, covering every aspect of your financial life.

Below is a brief list of the elements of a comprehensive financial plan. We discuss the major parts of a plan in more detail following the list. 

• Cash flow and expenses – A financial planner will review your cash flow and expenses, monthly and yearly.  
• Investment planning – Savings and investments to provide emergency cushions and to achieve your goals. 
• Retirement planning – A financial planner will review and advise on your retirement, including investments, asset allocations, tax planning, and your retirement plans (when and where). 
• College planning – If you have children (or grandchildren), college planning may maximize your savings and tax advantages. 
• Risk management – Your assets, such as your home and vehicles, need risk protection in case of loss or damage. As a result, home and vehicle insurance should be part of a financial plan, so replacing or fixing them will also protect your cash and assets. If you have dependents, you should also have life insurance to protect them financially in case something happens to you. Health insurance for you and your family is also part of risk management, as healthcare expenses can imperil financial security.
• Estate planning – An estate plan covers end-of-life care and plans for your estate and beneficiaries.

Management of cash flow is the bedrock of all financial planning. Many people are unclear about exactly how much cash flow they have, either in total or how much is left over after the bills are paid every month. 

Cash flow management provides clarity. A comprehensive financial plan will review your income versus your expenses, by month, quarter and year. 

If you need to modify any aspect of your income and expenses, these reviews will reveal it. If, for example, your goal is to spend the next decade maximizing your retirement savings, a cash flow review lets you know how much disposable income you have to accomplish this. If you need more disposable income, a financial advisor can help you strategize reducing expenses (or increasing your income).

It’s not uncommon for Gen X’ers to have a lot of debt. In fact, a 2019 survey revealed that Generation X is the most highly indebted generation, with an average of $36,000 in debt (excluding mortgages). Boomers, by contrast, had an average of $28,600 in debt, and Millennials just under $28,000. 

That Generation X carries the highest average debt is not surprising. You may have a mortgage, several children in school, and perhaps even help to support your parents. 

But debt has the potential to sap cash that could be used for the achievement of your goals. The monthly debt service on $36,000 can be considerable. If you want to travel extensively or buy a second home, for instance, it may be difficult to do so with a large amount of debt.

The answer? A plan to manage your debt in the most efficient manner possible. 

Financial planners may suggest debt-management strategies, including consolidating your debt on a lower interest rate credit card or a personal loan (whose interest rates are lower than credit cards). The lower the interest rate, the lower the monthly debt service. 

Other strategies may include targeting high-interest rate debt as a priority to pay off or targeting debt by amount, or paying off the smallest creditor first so that the number of creditors diminishes along with the aggregated total. (These strategies are known as the avalanche method and the snowball method, respectively.)

The goal of all these debt management strategies is to reduce the disposable income that goes toward debt service.

Tax planning is important for everyone, but it’s especially crucial for those, like Generation X, hitting their peak earning years. While everyone needs to pay the taxes they owe (and thus avoid penalties), tax planning is designed to minimize taxes as much as possible. 

Numerous tax planning strategies exist. One of the most common is tax-advantaged retirement plan savings. If you have access to a 401(k) through work, for example, you can save up to $19,500 pretax. If you are 50 or older, you may be able to save an additional $6,500. 

Many companies offer a matching 401(k), in which they match the percentage contribution of the employee. If you have access to a matching 401(k), you are leaving money on the table if you don’t participate in the match.

For Gen X’ers without access to a 401(k), traditional Individual Retirement Accounts (IRAs) are typically tax-deductible up to $6,000 per year. If you’re 50 and older, you may be able to contribute an additional $1,000 annually.

Funds in traditional 401(k)s and IRAs both grow tax-free until you withdraw them at retirement.

With the rising costs of college education, more and more people are actively planning for these costs, for both their children and grandchildren. 

One of the most common methods is to invest in a 529 savings plan. Earnings are not subject to federal tax, and the investments grow until they are withdrawn for qualified educational purposes, including tuition.

Estate planning covers two things: end-of-life care and the disposition of your assets after you die. 

End-of-Life Care

A comprehensive estate plan includes giving trusted individuals power of attorney, both for medical affairs and for financial affairs, should you become too ill or incapacitated to manage your own affairs. (This can be the same person or several different people.)

The power of attorney for medical affairs results in the ability to legally make healthcare and medical decisions for you if you become unable to make them yourself.

The power of attorney for financial affairs gives the named individual(s) the ability to make financial decisions if you are unable to do so. They can, for example, pay bills while you’re in the hospital or withdraw funds from your investments to pay for long-term care.

Wills and Trusts

Everyone who has assets should plan for how they want their assets treated after their death. 

Yes, it’s not pleasant to think of dying. But without a plan, your assets could be tied up in probate court for months or even years. Your family could be left without the funds they need to live. Family members and friends may fight about assets or disagree about what they think your wishes were. Rifts can develop that take years to heal.

A Last Will and Testament is a legally binding document indicating the beneficiaries of your assets and which asset(s) you want them to receive. It needs to be properly executed, witnessed, signed, and follow all aspects of the law to be binding.

You can also set up a Trust to administer your assets to your beneficiaries. Some trusts allow beneficiaries to access some of your assets while you are alive, but others do not go into effect until you die. In a Trust, a Trustee administers assets for your beneficiaries.

While the information given above outlines the elements of a comprehensive financial plan, it only scratches the surface about how a fee-only CERTIFIED FINANCIAL PLANNER™ Professional can help you plan to meet your goals. 

A CERTIFIED FINANCIAL PLANNER™ Professional is required to have education and expertise in all elements of a comprehensive financial plan. They must be up-to-date about changes that affect individual finances, such as tax codes.

Financial planning is time-intensive. Few people have either the knowledge or time to develop a comprehensive financial plan for themselves. Leave it to the professionals! 

At Sapiat Asset Management, we use a personalized process to identify the financial and retirement planning strategies unique to Generation X. Our knowledge of your financial situation is a big part of the foundation that drives our relationship with you. Contact us today for a complimentary consultation.