Gen X at the Crossroads: Baby Boomers' Kids Could Face a Retirement Squeeze

By James O'Brien.

It's almost as if history conspired against Generation X.

The dot-com bubble burst at the turn of the century, disrupting many Gen-Xers who were in the early years of their careers. And add to that a stock market drop of nearly 80% before the recovery in 2003.

Next, many in Generation X took their mortgages in the early 2000s, just before the housing market fell apart, and then the 2008 recession brought on another market decline -- this one in the neighborhood of 60%. Gen-Xers are reported to have lost some 45% of their savings in that event alone.

Now, as the first wave of their Baby Boomer parents approach age 80 -- 2026 should see the first wave of what some are calling a "silver tsunami" -- the situation stands to create additional expenses for many Gen-Xers as care-taking responsibilities kick in. All told, some experts predict that Generation X might only be able to replace half their working income in retirement.

With that in mind, let's look at the numbers, the challenges, and what Gen X can do about an impending retirement squeeze.

Strategies for getting on track
"The oldest Gen Xer is 48 years old today," says Melissa Joy, director of wealth management at the Center for Financial Planning. "They still have 10-25 years to prepare for retirement."

A key advantage of Generation X? Many of its members are in the middle of their peak earning years. That is, for the Gen-X worker who has the wherewithal to take a proactive approach, it's a good time to take a fresh look at investing in retirement accounts.

1. Invest in tax-deferred instruments
Boost your retirement savings through defined-contribution plans like 401(k)s and the like. And don't simply default to a low minimum-savings rate; increase it incrementally each year. Adding to your 401(k) contributions by just 1%-2% annually has little effect on your perceived take-home pay because the contributions are made pre-tax, but it can significantly change your final retirement account balance.

• For example, let's start with an average-age Gen-Xer -- we'll say they're 40 years old -- making $50,000 annually. Our model member lost almost all of their retirement savings in the 2000s, and so they begin fresh, investing via their company's 401(k). Their employer matches 50% on the first 6% of contributions, and the portfolio returns a reasonable 7% annually. Each year, until age 45, they add 1% to their contribution amount. At that point, they'll have accumulated a total of about $35,000. (We calculated this number with one of the many online 401(k) calculators -- in this case, Bankrate's.)
• From age 45 onward, if the Gen-Xer continues to contribute to the 401(k) at 11%, the account will total approximately $435,000 by the time they're 65.
• Additionally, if the employee is receiving any kind of inflation adjustment in their wages -- something on the order of 1%-3%, for example -- their paychecks could still increase, even with the 1%-2% 401(k) contribution hikes.

2. Delay Social Security to boost benefits
A few years can make a huge difference. By putting off Social Security until age 70, Gen-Xers can see a pronounced increase in benefits. For example, a worker born in 1974, making $50,000 annually, could retire at 65 with an estimated $4,100 in monthly Social Security income (in inflated future dollars). Wait until 2044 to retire, however, and that estimate climbs to nearly $6,700 per month -- a 63% increase. Again, online calculators help with these computations; we used the Social Security Administration's Quick Calculator.

3. Consider an expense-cutting relocation
Not everyone can move house to save money -- a recent Accenture report puts the U.S. independent workforce (i.e., freelancers, contractors and temps) at some 20%-33% of all workers -- but if you're a Gen-X professional who isn't tethered to a single location, then making a new home in a market with lower taxes, cheaper housing, and a reduced cost of living can mean adding to your retirement investments for many of the critical years you'll need to be saving.

If moving house is too drastic a change to make, one key to a secure retirement for the Gen-Xer is to take a balanced look at where their revenue is going overall. There's still time to make financial decisions that front-load one's process for sustainable success in the post-work years.

"They need to avoid pitfalls like adding to debt rather than paying it off," says Joy.

Turning 65 or 70 years old doesn't have to spell financial hardship for the children of Baby Boomers in the U.S. Take control of your finances and don't let memories of market shocks scare you away from investing in your retirement.