What Gen X and Gen Y Can Do to Get Ready for Retirement
While there are signs that hint an economic recovery is indeed reality, worries about retirement have worsened.
A recent Pew study shows that Americans are more worried about their retirement finances than they were at the end of the Great Recession. Nearly 40% of adults recently polled said they were “not too” or “not at all” confident they will have enough income and assets for their retirement, up from 25% in 2009. The biggest anxiety was among people ages 36-60, 53% who said they felt that way. However, the 60-64 year-olds were less concerned, with 34% expressing those fears, and the 18-22 year-olds were even less fearful, with only 27% sharing those sentiments.
What's stoking those doubts? Research from ING offers some insight. In a recent survey of 25-34 year-olds, 52% had an average student debt of $37,100, and 45% had consumer debt of $5,448. Eighty four percent said that something gets in their ability to save, with 36% citing low income as a culprit. While 72% contribute to their employer's retirement plan, 49% contribute 5% or less. Among those 34.5-49, polled by ING, 10% don't plan to retire at all, 14% have not started to save for retirement. Twenty two percent of this group have an average student loan debt of $35,300, 42% have an average of $6,904 in consumer debt, and 72% have an average mortgage of $193,000. Of the 78% that contribute to an employer sponsored retirement plan, 36% contribute 5% or less.
“For the X and Y generation, retirement is especially worrisome. Many bought first and second homes at the top of the market and may have no equity or even worse, negative equity. Combine this with unemployment, underemployment, declining 401(k) savings, uncertainty about the long term viability of Social Security and extended life spans, and you have cooked up a very dark soup,” says John Geenen, managing partner with Waterfront Financial Group.
It's not that they don’t know what they should be doing. “Clients in their 30s and 40s have difficulty taking advice offered because many of them are financially stretched by the cost of raising kids, a weak economy, and in some cases, also having to provide for parents who did not plan well. Clients understand the need to put money away, but find it even more difficult now,” says Gloria Birnkrant, a certified public accountant and partner with NSBN.
The good news for those in their 30s and 40s, while the retirement clock is ticking, there's still time.
“If you haven't been funding a retirement plan of some kind, do so immediately. Put that payment as a priority in your budget, even if it is only a few hundred dollars a month. Take full advantage of any 401(k) matching plans that your employer might have. At least, put in the amount necessary to get the full employer match. Do more if you can,” says Birnkrant.
If you're already contributing to retirement savings, ramp it up a notch. Don't bet the farm on your 401(k) though. “A 401(k) is not the only way to accumulate for retirement,” says Ron Campbell, president of Campbell Financial Services.
Think like a CEO
The traditional safety net of pensions and lifelong employment no longer exist for most people. Those who are in the workforce need to understand that rules of money have changed over the last few decades, points out Ted McLyman, author Money Makes Me Crazy. “You have to think of yourself as self-employed and create your own retirement package instead of relying on employers to create it for you. There are a variety of investment vehicles such as IRAs and annuities that can help you reach your goals.”
Learn from experience
Use the experience of the Great Recession as a motivator to take prudent financial steps – like having an emergency fund. “Use this as a lesson to not take on too much risk by overextending on home purchases or making investments that carry too much loss potential versus your goals,” says Karen Goodfriend, a principal of KK Wealth Advisors.
Assess your career
People in their 30s and 40s may live well into their 90s and beyond, acknowledge that time horizon. Chances are, you'll work beyond 65. Ask yourself whether you're in a career that you enjoy and are willing to be employed possibly into your 70s, says Goodfriend. “If not, think about making a change now or in the future, as a 'second act'. Sometimes I see people dislike their jobs and can't wait to retire in their 50s, and they could be better off financially and emotionally by finding something they truly enjoy and by working longer they will enjoy a better retirement later.”
Analyze your debts and come up with a strategy for whittling it down in a comfortable fashion. “Refinance your mortgage, maybe from a 30 year to 15 year, if you're in a position to do so,” says Etta Money, president of InCharge Debt Solutions. Grow up. “You are middle-aged, live within your means.”
Not only do you need an emergency fund, be sure you are well insured – covered for life, auto, health, home and disability. It's not too soon either, to begin putting together legal documents like wills, trusts and health care proxies, says Michael Fliegelman, president of Strategic Wealth Advisors Network. “The greater the protection, the more confidence you'll have because the risk of significant losses are reduced or eliminated.”
Also think ahead and plan for your children's education. “If you wait too long, you may be forced to borrow from your retirement to pay for your kid's schooling,” warns Money.
If you want to “test drive” what you think your retirement budget might be, take three months and practice living off of it. This will allow you to see how much you will need to have when it comes time to retire and will help you evaluate how much to save, advises Derrick Kinney, a principal with Derrick Kinney & Associates.
Put your priorities first
There is no standard formula for the perfect retirement; everyone is unique. Says McLyman, “Your retirement strategy should be based on your values, your money temperament (how you think and feel about money) and your learning style. Allow these factors to form the foundation for your action plan – the specific financial behaviors you take on a daily basis that will allow you to live happy now and retire successfully down the road.”
Edit 12/2/12: Corrected a few typos.