Generation X: Savings, pensions, and Social Security

pink-lesleyThis is the second blog in a three-part series exploring the economic history and future of Generation X. The series also focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments.

Generation X faces major retirement challenges.

Besides the issues of job security and stagnant wages, there is the topic of cold hard cash—saving enough, having enough, allocating enough.

Some Gen Xers know that they started saving too late and wouldn’t be able to make up the difference. Others were worried because they’d been saving since they got their first jobs—20+ years ago—and felt that that money still wouldn’t be enough when they reach retirement age. And others just couldn’t save. As one fellow Gen Xer put it, “My wife and I don’t make enough together to save for retirement and the kids.” And let’s not fool ourselves—“retirement age” no longer has a firm definition.

We Gen Xers aren’t alone. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute, “Almost two-thirds of workers (64 percent) say they feel they are behind schedule when it comes to planning and saving for retirement.” This survey also notes that cost of living and day-to-day expenses top the list of reasons why workers don’t save (or don’t save enough) for retirement.

Pensions, often referred to as defined benefit (DB) plans, used to be a mainstay. But they are not as common as they once were, and this, too, is affecting Generation X. In fact, according to Jennifer Leigh Parker on CNBC.com, Generation X is the first generation to see its pension leg replaced by 401(k) savings plans, which were increasingly adopted during the 1980s. The 401(k) plans are portable but aren’t designed as a monthly “pension paycheck.” The owner of the account balance has to take significant action to understand and convert any or all of it to that pension paycheck. Gen Xers , in general, will find that its collective savings plan account balances are woefully deficient and for many, sitting in a tax-deferred account. And the Internal Revenue Service (IRS) can’t wait for us to start cashing them out.

Additionally, we Gen Xers, who have been paying Social Security payroll tax for years, may not receive full benefits upon reaching retirement age.

The 2015 report of the Social Security trustees issues a warning that the promised retirement benefits under current Social Security law may need to be reduced in 2036 by around 25%. This comes at a time when more workers will be counting on Social Security for much of their retirement income. A Gallup survey conducted in April 2015 found that 36% of working Americans expect that Social Security will be a major source of income in retirement, the highest rate in 15 years.

The combination of less savings, a less secure retirement plan, and less money from Social Security will likely cause a significant income gap—and create a dire financial situation for those of us in Generation X.

Is there a solution?

First, Gen Xers should realize that there is still time to figure all this out. To start with, we should determine the type of lifestyle we want in retirement and look at our total personal budget (mortgage, tuition costs, healthcare expenses, etc.), resetting any previous expectations. The best way to begin is by breaking down the total dollar figure needed for retirement and determining how best to get to that figure.

When considering savings goals, Gen X should keep in mind that transportation, housing expenses, and taxable income all normally decrease in retirement. And saving for retirement won’t be an issue.

Gen Xers should treat retirement savings as if they are medical benefits—and factor them in as part of overall pay. We should aim to save 10% to 15% of our income. While for many of us this isn’t possible, saving a small percentage is obviously better than saving nothing. Many employers now have auto-enrollment in their retirement plans, allowing new employees to be enrolled immediately. Once savings plan deductions are being made from pay, Gen X should be aware that employers are likely to auto-increase savings plan deferrals.  Higher contributions occur if we get pay increases and/or by an automatic increase in the percentage of pay deferred (usually by 1% per year until the deferral is 6% of pay) and matching funds from our employers. These seemingly small factors can make a big difference.

The common thinking is that Social Security is normally expected to replace 40% of the income we earned before we retired. Gen Xers, because we will most likely not receive 100% of Social Security benefits, will need to come up with additional cash to compensate for that gap. Enrolling in a retirement plan helps fill in the gap.

In part three of this series, we will discuss Generation X and healthcare expenses.

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