Top 5 Musts For Gen X Retirement Planning When the Stock Market Plunges!
Generation X in Tennessee, those born between 1965 and 1980, are getting progressively closer to retirement. While they’re not right next door like the Boomers, the oldest Gen X’er is 55 – meaning that retirement is just a decade away.
Many Gen X’ers, though, are somewhat behind the curve when planning for retirement. The median retirement savings average for Gen X members is $35k. That’s not a lot when you consider that many Americans are urged to save $1 million for the golden years.
It also may not look promising when you consider that the stock market has plunged since the coronavirus pandemic hit the United States in earnest during March 2020. Shutdowns and shelter-in-place orders have led to certain sectors of the economy being severely impacted and in widespread layoffs.
While the majority of Americans – 62 percent – feel they need more of a retirement nest egg, the figure is larger among Generation X. Seventy-three percent indicate that need to play catch-up in retirement savings, versus just over half of Boomers and 66 percent of Millennials, the generation after Gen X.
Why? Well, they came too late for pensions, which began to be phased out in the 1980s. Plus, they were in the workforce during the Great Recession of 2007-2009 and thus poised to be hit with downsizing or wage freezes. Some Boomers, on the other hand, have pensions, while many Millennials were too young to be in the workforce during the Great Recession.
But many Gen X’ers are very aware of retirement and have plans to get on track to save. Roughly 43 percent say they think of downsizing their home as a way to catch up with retirement needs, and 46 percent plan to work past retirement age.
Both these plans can power a comfortable retirement. But that’s not the full arsenal of strategies! Here are the top five ways to increase Gen X retirement planning, even with a dropping stock market.
#1 Maximize your retirement contributions
The fact is, the best way to save for retirement is…to save for retirement. If you have access to a 401(k) retirement plan, you save in multiple ways. First, the money is taken out pre-tax, so you save on taxes right off the bat. Second, it’s easier to save if it’s taken out automatically.
Third, if your company offers a match on 401(k) savings, your participation takes advantage of what is essentially free money, as your company contributes a percentage of what you do.
If your company doesn’t offer a 401(k), invest the maximum in an individual retirement account (IRA). Traditional IRA contributions are tax-deductible in the year of contribution. People can invest up to $6,000 in an IRA for 2020. If you’re 50 or older, the maximum rises to $7,000.
#2 Diversify your portfolio
Does it seem difficult to save for retirement when the stock market is falling? Remember this: the U.S. stock market as measured by the Standard & Poor’s 500 rose more than 11 percent every year, on average, in the years between 1973 and 2016. This average includes the Great Recession when it sank 37 percent, and the dot.com bust of the early 2000s, when it fell almost 12 percent in 2001 and more than 22 percent in 2002.
Although the stock market is historically strong on average over the decades, it doesn’t hurt to diversify your portfolio as a way of saving for retirement as well. Talk to a financial advisor about your risk tolerance and diversification strategies that can help you prepare for retirement.
#3 Invest in a Health Savings Account
If you have access to and are qualified for a Health Savings Account (HSA), it can also maximize your retirement savings. To qualify, you need to have a high-deductible health plan (HDHP), which the Internal Revenue Service defines as having a deductible of at least $2,800 for family coverage. The yearly out-of-pocket expenses cannot be larger than $13,800 for a family.
On average, couples pay $280,000 in healthcare costs after they turn 65. Part of your retirement planning, then, should be focused on covering these costs.
HSAs are an ideal way to do this because unlike their cousin the Flexible Savings Account (FSA), the money in them does not have a use-it-or-lose-it provision. If you don’t use the money in an FSA in a given period of time (generally a year or slightly more), it vanishes. But if you don’t use the money placed in an HSA, you can keep it up to and throughout your retirement.
Many HSAs offer pretax contributions as well, which lowers your overall taxable income. For 2020, you can contribute $7,100 for a family. If you are 55 or over, your maximum contribution is $8,100 for a family.
HSAs can be invested in stocks, bonds or cash. Both contributions and any portfolio increases are tax-deferred. If your contribution is for qualified healthcare costs, distributions are tax-free.
#4 Reduce debt to take advantage of low-interest rates
Here’s a silver lining to the coronavirus crisis: right now, interest rates are at an absolute rock bottom. The lower the interest rates on any debt, the less you pay in debt service, and the quicker you can pay off the debt.
If you have credit card debt, use this period to get the lowest annual percentage rate (APR) you can. If you have any other kind of loan, check into refinancing.
That includes mortgages, of course. It can pay, in this period, to see if it would benefit you to refinance your mortgage. Generally, if you plan to stay in your house in the medium- to long term and your current interest rates are high, refinancing can save your money every month.
#5 Plan to minimize your taxes
Any time you can minimize your taxes, do so. Be sure to take advantage of tax-deferred educational savings accounts like 529s, for instance, if you are saving for your children’s or grandchildren’s education. Earnings are not subject to federal income tax when used for qualified higher education expenses.
For these and other strategies to plan for retirement, Sapiat Asset Management is at your service. We provide comprehensive financial planning, with a special focus on Gen X. If you feel you should be doing more for your retirement, we can help you get you on the right financial track.
We are the only fee-only fiduciary advisory firm in Greeneville. 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.