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Why Generation X Won't Retire Rich

Wednesday - 5/22/2013, 4:25pm  ET

Retirement savings took a huge hit during the financial crisis and market meltdown five years ago, with savers of all ages feeling the brunt of plunging markets. But members of Generation X -- those born between 1966 and 1975 -- suffered the worst declines in their net worth from the crisis and saw the least recovery in the years that followed.

As a result, Gen-Xers are in bad shape when it comes to retirement readiness, as a recent study from the Pew Charitable Trusts concluded. With only enough financial resources to replace half of their pre-retirement income, the key question for Gen-Xers on the whole isn't how financially secure their retirement will be, but rather whether they'll be able to retire at all.

The fallout from the Great Recession
The most unfortunate thing about the plight of Generation X is that prior to the financial crisis, Gen-Xers were doing relatively well. As the study showed, by the time they reached their late 30s and early 40s in 2007, Gen-Xers had done a better job than the late-boomers born a decade earlier in building wealth, with a median net worth of more than $75,000 besting their older counterparts by more than 20%.

Unfortunately, the combination of the housing bust and the stock market plunge hurt Gen-Xers' net worth a lot more than more conservatively invested older generations. From 2007 to 2010, typical Gen-Xers lost 45% of their net worth, dropping their wealth levels below $42,000 in just three years. Although older generations took larger hits on a dollar-value basis, the larger amounts they had managed to save up meant that their typical losses were within the 20% to 30% range.

High debt levels have been a key element in holding Generation X back financially. From 2001 to 2007, Generation X nearly tripled their debt levels, leaving them especially vulnerable to the financial disruption that the recession created. Moreover, although baby boomers have dramatically slashed their outstanding debt more recently, Gen-Xers haven't had the financial resources to do so, with only a modest drop of about 5% in typical debt levels from 2007 to 2010.

What will keep Generation X from retiring rich (or at all)
The more pervasive problem that Gen-Xers face is the dearth of financial assets within their investment portfolios. A disproportionate amount of Gen-X wealth as of 2007 was in the form of home equity, with typical Gen-X financial assets totaling less than $20,000 even before the market meltdown. When the housing bust wiped out much of Gen-Xers' net worth, taking an average of more than 25% off their pre-bust home equity, the lack of other assets became even more evident, and typical portfolio levels fell below $15,000 by 2010.

Yet a closer look shows huge disparities within the generational cohort. When you compare the members of Gen X who are best-prepared to retire with their worst-prepared counterparts, the gap is greater than that of any other generation in the study.

Still, even when you look at overall numbers, Gen X isn't getting the job done when it comes to getting ready for retirement. With private pensions disappearing and Social Security under threat, that paints a dire picture for the retirement prospects of Gen-Xers down the road.

How to travel the hard road ahead
The one thing Gen-Xers have going for them is time. With longer to prepare for retirement than baby boomers, making smart moves now could help many Gen-X members escape the fate of a poor retirement. In particular, consider these moves:

  • Investing better will be a key to Gen-X success in the roughly 20 years they have before reaching retirement age. Gen-Xers would do well to follow the examples of their younger Generation-Y peers, who have boosted their allocations to stocks despite expressing extreme discomfort about taking on financial risk. Taking on the heightened volatility of small-cap stocks through iShares Russell 2000 ETF or similar ETFs might produce better long-term returns than Vanguard Total Stock and other broad-market options, but many Gen-Xers are uncomfortable with either of those choices. Yet for the most nervous investors, even more conservative stock investments will likely beat out savings accounts and other near-zero-return alternatives. For instance, PowerShares S&P Low Volatility and iShares MSCI USA Minimum Volatility are designed to hold stocks that have provided a smoother ride in the past, and although that doesn't guarantee low risk in the future, the strategy could be a more comfortable one for nervous investors.
  • Despite their financial challenges, paying off debt more quickly and saving more to invest will also be critical elements of a successful financial plan. In a tough job market, there's only so much that Gen-Xers facing unemployment or underemployment can do on that score, but even those who are more fortunate on the job front should look hard at boosting their savings.
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