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How Bad Is The Retirement Picture For Generation X?

July 16, 2013
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By Brian Frederick, CFP

Learn more about Brian on NerdWallet’s Ask an Advisor

Recent research from The Pew Charitable Trusts and PwC have gotten a lot of publicity for the sorry state of Generation X retirement planning.  While both surveys are thorough and well researched, I also believe that the reaction to these studies has been overblown.  In any generation, there are people who are above the average as well as below the average. Here are my thoughts and observations about what I’ve seen in regards to Gen X finances:

  • It is dramatically more expensive to raise children now than it was thirty years ago. There are more families with two working parents and quality daycare can be $1000/month or more, higher education expenses have gotten out of hand, and poor job prospects are leading to more boomerang kids. I used to think that taxes are your biggest expense, but now I’m starting to think that it’s children!
  • Younger generations are increasingly mobile and more highly educated than they were in the past. Unlike the ‘good ole days’ when you’d marry your high school sweetheart and have children in your mid to early twenties, couples now are getting married and having children ten to fifteen years later due to the time spent in college and/or graduate school and the difficulty of finding a spouse in a new location where you have weaker social connections. Other life events such as buying a home and saving for retirement are being delayed as well.
  • Depending on your income and savings rates, typically the first $100,000 to $250,000 that you put away is a result of your savings efforts (and your employer match, if you have one) while little is from asset growth. Additionally, stock markets run in long term, 15 to 20 year, cycles and we are in the middle of a cyclical sideways market which means that there is even slower growth of investment accounts. The flip side of this is that there is a possibility that we will be in a prolonged bull market at the later end of Generation X’s working years and the first years of their retirement. This is a good thing as the most important time to have good investment returns is in your last five years of working and your first five years of retirement.
  • Again, compared with thirty years ago, there is much more discretionary spending on things such as communication (TV, cellphone, phone, and internet), domestic services such as a cleaning lady or yard guy, and going out to eat. I remember as a kid growing up in Nebraska in the 1980’s that we went out to eat twice a year (for Mother’s Day and Father’s Day) and my parents only had a rotary dial phone and no cable TV until 1987. Now I commonly see clients spending $300-500/month for both communication and going out to eat.
  • The Pew study, in particular, goes into a lot of gory detail about how Generation X got blown up when real estate values went down. I’m not surprised by this since a primary residence is both the biggest asset and biggest liability on a typical Generation X family’s balance sheet and it is highly leveraged! Unless you’re a real estate investor, I view the primary residence as a use asset instead of financial asset.  The real disadvantage to lower real estate values is that it is difficult to sell an underwater house in order to pursue career opportunities.
  • With the rise of the internet, no-load mutual funds, discount brokerages, Turbo Tax, and the financial media Generation X is truly a do it yourself generation.  While there is more information out there than ever, it doesn’t necessarily mean that there will be better financial decisions being made.  The question becomes when do you bring in a professional? One of the exciting things that I see is that advisors are leveraging technology to better serve smaller clients; the downside is that most advisors are over age 50 and there is predicted to be a growing shortage of qualified financial advisors. The other conundrum is that those who need financial advice the most are also those who have the most difficulty finding the money to pay for it. The sooner you get professional help, the more options you’ll have.

The bottom line is that Generation X got a later start with investing, has less discretionary income to put away, and a greater need to save in a low return environment with fewer pensions.

How are you positioned for retirement?  Do you feel more or less confident than you did 1,3,5 years ago?  Do you feel that you are behind the curve or ahead of your peers?  Share your thoughts in the comments below.


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