Top 3 Gen X Retirement Planning Tips
Date: October 5, 2020

Top 3 Gen X Retirement Planning Tips

The oldest members of Generation X, born between 1967 and 1982, may have a lot of work ahead of them before they can retire comfortably. A large majority have no retirement savings. Almost half aren’t contributing to retirement savings accounts they’ve set up. Of those that are, the median retirement savings is only about $70,000. 

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Yet the oldest Gen X’ers are entering their final decade before retirement (if they plan to retire in their mid-60s), while the youngest are firmly in midlife – it’s time to think seriously about Gen X retirement planning. 

The goal of retirement planning is financial freedom to achieve your goals and retire when you want. But for Gen X’ers, that median $70,000 retirement savings is likely to produce only $2,800 every year, assuming an average withdrawal of 4 percent annually. That’s just about $233 per month if you’re dicing it up. 

Plus, the average monthly Social Security benefit hovers around $1,450. So if just under $1,700 every month total is enough to support you comfortably in retirement, you’re fine. If not – and for the vast majority it isn’t – it’s time to kick your retirement planning into high gear. And if you haven’t yet saved anything, fear not – there’s also plenty of time to get your strategy into high gear. 


How We Got To Here

Part of the reason Generation X is in this predicament is, well, generational. Their predecessors in the Greatest Generation and the Baby Boomers could rely much more on pensions and Social Security to completely cover their retirement. 

Why? First, because pensions were much more widespread for earlier generations. They began to be phased out in the 1980s – just when the youngest Gen X’ers were just children.

Second, because Social Security covered more of the cost of living. Cost of living increases in medical care and in real estate prices in some areas of the country over the past several decades have far outpaced Social Security – and that’s to name just two categories.

In addition, Gen X faces competing demands for the dollars they make that previous generations either didn’t face or didn’t face to the same extent. More must look after aging parents because life expectancy has grown. 

Educational expenses have soared in the past several decades. Gen X’ers may be saddled with student debt themselves and trying to save for their children’s education to boot. The demands of 401(k)s and other retirement funds may end up coming last, or not be in the running at all.

Not only that, but Gen X may have tapped what they did manage to save in retirement funds for other expenses. Roughly 30 percent of Gen X’ers have borrowed against their 401(k)s.

So what should Gen X do now? Start a strategy. Planning for a comfortable retirement is still very doable – but you need to follow these top three retirement planning tips.

1. Maximize your workplace’s resources

This rule is simple. If your workplace offers a 401(k), maximize your contributions. If they offer a match, save enough to at least obtain the available match.

Currently, people can save up to $19,500 in 401(k)s annually. If you’re 50 and over, you can save an additional $6,500 per year. 

Contributing to a 401(k) maximizes your financial life in other ways as well. Contributions to a traditional 401(k) are made pre-tax, which lowers your tax burden. (Contributions to a Roth 401(k) are taxed, but can be withdrawn in retirement tax-free, while traditional 401(k) withdrawals are taxed when withdrawn in retirement.)

In addition, the appreciation on your 401(k) funds always grows tax-free until withdrawal.

Don’t, by the way, withdraw funds from your 401(k). If you withdraw funds from a traditional account, or a Roth account before you’ve held it five years, the Internal Revenue Service (IRS) will hit you with a 10 percent withdrawal penalty and tax the funds at your existing rate. Plus, you’ll forfeit the years of appreciation that you could be getting. 

2. Put together a financial plan for competing demands

It’s not at all uncommon for Generation X to juggle competing demands for all their funds. 

The crucial component here is to find a CERTIFIED FINANCIAL PLANNER™ Professional who can help you develop a comprehensive financial plan to manage these demands. It’s possible your parents and grandparents retired without ever seeing a financial advisor. But your generation is the first that has to actively manage their retirement – and everything else.

A CERTIFIED FINANCIAL PLANNER™ Professional is trained in all aspects of finances and knows the challenges you’re facing. They can help.

3. Focus on the basics

Your CERTIFIED FINANCIAL PLANNER™ Professional is likely to create a financial plan for you that focuses on the basics. The basics are budgeting, getting out of debt, and lowering your taxes. Let’s look briefly at each one. 

In financial plan terms, budgeting does not mean buying only generic products in the supermarket and skimping on vacations. It means establishing your goals, and then working toward them prudently. 

Then, it means creating budgets that show your expenditures in each major category vis-à-vis your income. If you don’t like the word budget, think of them as cash flow statements. 

These statements help you focus on where your money is going and whether you are living beyond your means. If you need to increase your disposable income, they provide a snapshot so you can decide where to trim spending.

Many Gen X’ers do need to get out of debt. In fact, many have faced competing demands by whipping out credit cards (or getting personal loans). But debt service can drain your available funds every month. A budget will help you maximize debt payments while also meeting your goals.

Tax planning is designed to increase your disposable income by reducing your taxes as much as possible.

The first step in tax planning is to make sure you maximize retirement savings, since virtually all types of retirement accounts are tax-advantaged, including individual retirement accounts (IRAs). 

But a CERTIFIED FINANCIAL PLANNER™ Professional can also point out other important tax planning moves, such as saving in tax-advantaged health care savings plans if your company offers them (Flexible Spending Accounts or Health Savings Accounts) and tax-advantaged educational savings such as 529 accounts. They can also advise on tax savings vis-à-vis your home payments and more.

When you look for a CERTIFIED FINANCIAL PLANNER™ Professional, be sure to look for one that works on a fee-only basis. This ensures that you will not be charged commissions and process fees – and the advisor, even more importantly, is not incentivized to recommend moves based on the ability to earn a commission. Their own incentive is to set up a financial plan that works for you.

At Sapiat Asset Management, we use a unique, personalized process to identify the needs of our clients. 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.

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Steve Dick