The Pew Charitable Trust study, “Retirement Security Across Generations, Are Americans Prepared for Their Golden Years” concluded while all age groups studied had losses during the recent recession (2007-2010), Gen-Xers (born between 1966 and 1985) were hit hardest. As a result of the down turn in housing and stock prices, Gen-Xers:
- Lost half of their net worth;
- Had enough savings to replace only about half their pre-retirement income; and
- Added to their debt, and at the end of 2010 had only a 2:1 ratio of assets to debt, compared to about 4:1 for late boomers (born between 1956 and 1965).
While the report is valuable, it has some limitations:
- Results are through 2010, and since then, the stock market has increased by around one-third and housing prices are about 10% higher
- Results are based on the median, and don’t reflect any particular individual’s or family’s situation
- Projections don’t reflect any changes in individual savings behavior.
In addition, the report doesn’t reflect any future legislative or regulatory changes (which may be unlikely in the present climate in any event) that could address some of the underlying issues.
However, the report is a healthy wake-up call for all pre-retirement generations, particularly for Gen-Xers. The good news is that there are lots of actions the Gen-Xers can take:
- Have a retirement plan that focuses on income replacement rather than on a savings “number”.
- Begin saving at a rate of 8% to 10% of wages; if not feasible, plan on saving at a faster rate during the home stretch to retirement (last 10 years or so).
- Take advantage of all qualified plan savings opportunities, particularly any employer contribution match.
- Consider working longer if in continued good health. For example, delaying Social Security from 66 to 70 can increase benefits 32%.
- Lower expenses in retirement by downsizing, and moving to a lower or no tax state. Remember it’s only your after tax income that is spendable.
- Make smart financial decisions that are under your control:
a. Diversify investments.
b. Minimize fees you’re paying on investment savings.
c. Pay down expensive debt like credit card balances.
d. Defer taxes on investment earnings for as long as possible.
e. Adopt smart payout strategies in retirement.
In a subsequent blog, we’ll provide results for a Gen-Xer from our Savings2Income retirement planning method. You’ll be surprised by the results.