Question: I’m a member of Generation X and starting to think seriously about retirement. What should members of Gen X know about the financial landscape when it comes to planning (or not) for Social Security benefits and maximizing savings?
Answer: When it comes to retirement planning, it’s time for Gen Xers to get serious.
Gen X members are hitting important ages on the retirement planning timeline. In fact, the oldest members of Gen X will turn 60 soon. The youngest Gen Xers, who are in their mid-40s, are generally hitting their career stride and entering peak earning years.
Like it or not, if you’re a member of this generation, it’s time to start getting serious about retirement planning. Here’s what Gen X should know about retiring and how to prepare for it.
[READ: Will Gen X Have to Retire Later Than Previous Generations?]
Gen X Should Eye the Generational Wealth Transfer
Gen X is set to be at the receiving end of a significant wealth transfer, collectively inheriting $30 trillion by the end of 2045, according to data from Cerulli Associates. You need to accurately account for how that might affect you from a savings, income and taxation standpoint. An inheritance can help make up for a savings shortfall, but you don’t want to assume you’ll be receiving one only to find out you won’t.
Of course, for each person, this is dependent on family situation and dynamics. It’s a good idea to have a frank discussion about it. That way you can incorporate realistic expectations in your long-range retirement plan.
[READ: States With Estate and Inheritance Taxes.]
Gen Xers Should Plan for a Long Retirement
For members of Gen X, there’s a good chance that retirement will be a multidecade experience. At age 60, your average life expectancy is another 23 years, according to the Social Security actuarial life table. Many people live much longer.
You need to think about how you will spend decades in retirement. If you abruptly quit working without an idea of what you’ll do next — whether it’s hobbies, spending time with family, passion projects or volunteer work — you may be disappointed. An idle retirement affects both your physical and mental health.
Gen X Is the 401(k) Generation – And Catch-Up Contributions May Be an Option
The 401(k) was created in 1978, making Gen X the first generation for which it became the primary vehicle, rather than pensions, for retirement savings. This makes savings even more important for Gen X than for prior generations.
If you’re a young Gen Xer or don’t plan to retire for many years, focus on your savings. Take advantage of employer-matching contributions and make sure you’re on track to hit your savings goals. If you don’t have defined savings goals, you need some. Once you turn 50, don’t forget to update your savings rate to utilize additional catch-up contributions. Those are currently at $7,500 for most workplace retirement plans and $1,000 for individual retirement accounts, also called IRAs.
[READ: What’s the Difference Between a Pension Plan and a 401(k)?]
When Gen Xers Should Retire
You’re financially ready to retire when you are confident that your savings, Social Security and other income sources are adequate to cover the expenses that you’ve budgeted for. That will depend on your estimated retirement budget and savings. Planning ahead puts you in control and gives you the ability to decide. If you don’t plan, you may be forced to work longer than you’d like.
A large component of that plan is your savings. In this context, you can think of a higher savings rate as a trade-off for extra working years.
Here’s an example:
Let’s assume you are 50 and will earn 6% on your savings each year. If you save $24,000 per year, you’ll have about $592,000 dollars saved after 15 years. However, if you only save $12,000 per year it would take you almost 23 years to reach the same balance. That could be the difference in retiring at 65 or 73, depending on your needs.
Gen X May Need to Make Up for Lost Income
Gen X was hit hard by the COVID-19 pandemic, with roughly one-third reporting their income was negatively affected according to a Society of Actuaries survey. That loss of income could create headwinds against your retirement savings and ability to pay down debt. You may need to develop a strategy to make up for it. Options might include:
— Delaying retirement to give yourself more time to save.
— Finding ways to reduce your spending to create room in the budget.
— Ensuring you are reaching your income potential, which may involve switching jobs or changing careers.
Gen X Can Use a Modified Calculation When Estimating Social Security
You likely haven’t started thinking about Social Security yet. But if you have, you’re undoubtedly aware that the outlook is gloomier for you than previous generations. The retirement trust fund is on track to be depleted by 2033, according to the 2024 Trustees of the Social Security and Medicare trust funds report.
However, that is not nearly as bad as it sounds and it does not mean that Social Security is going away. Remember, Social Security is a pay-as-you-go system with current workers paying for current retirees’ benefits. The trust fund exists to balance the surpluses and deficits between those two. If the trust fund is emptied in 2033, estimated worker contributions will continue to cover 79% of scheduled benefits.
The takeaway for you as a Gen Xer is that it’s reasonable to use a reduced, rather than $0, Social Security benefit in your long range retirement projections. You should still expect the majority of your benefits even if Congress does nothing to address the shortfall.
Gen X Should Consider Estimated Inflation in Retirement
Although it’s been a hot topic the past few years — for good reason — inflation doesn’t need to be any scarier now than it has been in the past. That’s not to say you should ignore it. Just like your savings and budget, you can plan for it.
The best way to plan for inflation is to incorporate an estimate into your retirement plan. Remember, it fluctuates over time and the historical average is about 3.3%, so don’t let recent experience convince you that you need to plan for double-digit inflation until the end of time.
Planning Is Key to Making Retirement Work as a Gen Xer
As a member of Gen X, you have to plan in order to make retirement work, and you’re in what are arguably some of the most critical years for effecting that plan. You still have time, but if you get behind now, it will be much harder to catch up later.
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Ask a Financial Pro: Here’s What Gen X Should Know About Retiring originally appeared on usnews.com
