Ask the Experts: Will We Ever Get to Retire?

Ask The Experts Will We Ever Get To Retire

The economy may be rebounding, but the effects of the Great Recession will continue to be felt for years, particularly when it comes to retirement.

The retirement outlook is especially ominous for older generations who should theoretically have a line of sight for their exit from the workforce, as Generation-Xers (ages 38 – 47) lost 45% of their net worth during the downturn, while young Baby Boomers (ages 48 – 57) saw a 28% decline, according to a recent report from the Pew Charitable Trusts.

Retirement Outlook:  Overcast with a Distinct Chance of Substantial Work

The report – titled Retirement Security Across Generations:  Are Americans Prepared for Their Golden Years? – is based on a triennial survey of family finances which has been conducted by the Federal Reserve and the Panel Study of Income Dynamics since 1968.  The survey tracks and compares financial assets, nonfinancial assets, and home equity to debt, and its most recent findings offer a resounding “No” to the aforementioned question that Pew posits at the outset of its report.

In other words, Americans are by and large prepared to work into their golden years, not enjoy them.

The evidence strongly suggests that early boomers may be the last generation on track to exceed the wealth of the cohorts that came before them and to enjoy a secure retirement,” Pew concluded.  “Gen-Xers are the least financially secure and the most likely to experience downward mobility in retirement. In their 30s/40s, the Gen-X cohort was behind where late boomers had been at the same age with respect to financial net worth, and they lost nearly half of their overall wealth in the recession.

Richard Himelfarb - HofstraThe Great Recession clearly is a big reason for our recent financial difficulties, but it’s only one piece of the puzzle and must not be viewed as a blanket justification for the uphill battle we now face, according to Richard Himelfarb, an associate professor of Political Science at Hofstra University. Himelfarb believes the recession magnified a shift in cultural values away from the dutiful saving habits of those who grew up in the shadow of the Great Depression to the spend it now (even if you don’t have it yet) attitudes of modern consumers. Apparently, we’d prefer to enjoy the American Dream lifestyle today and worry about tomorrow when it comes. But much like you could get caught without an umbrella if you don’t check the forecast, this strategy leaves us far less prepared to weather financial storms than our predecessors who readied themselves for that amorphous “rainy day,” knowing full well it might never come.

Perhaps that is why the Pew study also found a “lack of savings and wealth accumulation among Gen-Xers even before the economic downturn,” which led its authors to recommend that “as policymakers focus attention on Americans’ retirement security, particular consideration should be paid to helping the youngest cohorts change course and prepare for financial security over the long term.”

How Did We Get Here?

CardHub sought the opinions of leading retirement studies and public policy experts for additional insight into why the future is so bleak for aging generations as well as what, if anything, we can do to alter our fate.  And as you can see below, we can’t ignore the role of shifting cultural values or poor financial literacy when it comes to the why.

The Question:  Is the poor retirement outlook for Gen-Xers mainly attributable to the effects of recession or are there more substantial underlying issues in play as well? The Answers…

Alan SumutkaMany people, not only Gen Xers, encountered declines in personal wealth during the Great Recession, which caused job losses, stagnant wages, a lack of upward job mobility, declining housing and stock market values, and a resultant increase in debt.  However, I assume the lack of financial literacy also contributed to financial problems, as some did not understand the adjustable rate mortgages they obtained, failed to maintain adequate  emergency/reserve funds and/or prioritize spending, chose to ‘live for today,’ etc.

- Alan Sumutka – Associate Professor of Accounting at Rider University


Stephen WeismanGen Xers also have been hurt by the fact that they have carried much more debt than is fiscally sound to do.  Some of it such as student loans is understandable, but getting mortgages and car loans more than they could handle should have taught them a lesson in the importance of money management.

- Steven Weisman – Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University


Christian WellerThe bottom line is that Gen X is ill-prepared for retirement. Large shares of households have saved too little to maintain their standard of living in retirement. The most recent data from National Retirement Risk Index at Boston College’s Center for Retirement Research puts the overall share of all households at risk at more than 50%. Numbers are larger for younger households.

- Christian Weller – Director of the Graduate Program in Public Policy at the University of Massachusetts, Boston


Theodore AnagnosonThe lack of financial literacy is a factor in that more and more people in their working years have a 401K as their primary retirement instrument, and managing a 401K as you get older is extremely difficult for many people.  On the other hand, not being ready for a big dip in the stock market, as many people were not in 2008, was also a factor.  If I had to pick one over the other, I would opt with the stock market and the financial crisis/recession.

- Theodore Anagnoson  - Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara


Doug HersheyThere is no question that the recession has played a major role in the future financial outlook for Gen. Xers, but the underlying story runs much deeper than problems created by the recession. Other factors that stand to affect the financial security of the youngest cohort in the Pew investigation include their willingness to take on debt, the tendency to procrastinate when it comes to establishing a pattern of personal retirement savings, generally low levels of financial literacy, and (particularly for women) high levels of risk aversion when it comes to investing.

- Douglas Hershey – Director of Oklahoma State University’s Retirement Planning Lab


Eileen St. PierreThe recession certainly hasn’t helped, but this generation was in trouble before the recession hit.  They have more debt than than the earlier cohorts so making debt payments takes priority over saving for retirement.  Gen Xers are now at the age when they are starting to realize they are behind the eight ball.  I don’t think a lot of them really understand basic retirement planning. More of them, as compared with the earlier cohorts, are being forced to take a bigger role in their retirement planning as employers shift away from pensions to defined contribution plans.  When I talk to people (not just members of this generation), they really do not understand their retirement plans.  It is very common for them to have never accessed their accounts online and updated their asset allocation percentages.  They have no idea how their retirement funds are invested.  So yes, I think lack of financial literacy is a problem.  You can ask them to view a webinar or go through an online module (offered by many corporate 401k providers), but they really need to be taught the basics, preferably face-to-face.

- Eileen St. Pierre, Author of “The Everyday Financial Planner” website and a former Personal Finance State Specialist at Oklahoma State University


Ellen Bruce - UMBMost studies, as this one does, indicate that we have a problem with future generations being prepared for retirement including the early baby boomers. The problem is one of increasing numbers of retirees living in hardship because they do not have enough income and/or wealth to maintain a reasonable life style. I say “increasing number of retirees” because even today many retirees have a hard time paying all their bills, especially if they have long-term care needs.

- Ellen Bruce, Director of the University of Massachusetts Boston’s Gerontology Institute


Dave Littell - The American CollegeThere is some disagreement about the numbers. EBRI [the Employee Benefit Research Institute] actually shows the prospects of this group improving due to the prevalence of auto enrollment in 401(k) plans, meaning that more individuals are covered by retirement plans.

Retirement plan coverage is a key component of retirement readiness, and only 54 percent of workers are covered by a retirement plan. The percentage is higher for public employers and larger employers and much lower for small employers.

- David Littell, Director of the New York Life Center for Retirement Income at The American College of Financial Services


Sophia Anong - UGAGen. X’ers networth fell so much because most of them being young were aggressively invested (equities). Poor retirement outlook is a bit harsh analysis because their portfolios will recover, they have a 30-40years+ time horizon to do that if they didn’t react radically by perhaps overcompensating and moving their portfolios into safer fixed income assets, bonds, cash reserves, etc.

- Sophia Anong, Assistant Professor of Personal Finance at the University of Georgia


Erik Carter - Financial FinesseBased on our research, it seems that the recession has negatively affected this generation more than the others largely due two factors. One is being at a uniquely difficult stage in their financial lives when they’re facing the financial pressures of balancing saving for the future and paying down debt with the immediate obligations of mortgage payments and providing for your children. From our report:

    • 67% of 30-44 yr olds own a home compared to only 31% of those under 30. When the housing market collapsed, Xers were more than twice as likely to own a home as Millennials but probably had less equity in their homes than Boomers.
    • 65% have minor children, the most of any age group. Our previous stress report indicated that those with minor children reported significantly higher stress than those without. After all, studies have shown the cost of raising a child to average about $200k over their lifetime.

Second, this generation suffered from poor timing. They largely started investing and buying homes right before the financial crisis while Millennials were less likely to have much money in either the stock or real estate markets and older generations were buffered by decades of building up retirement savings and home equity. As a result, when the crisis hit, Generation Xers were impacted more.

- Erik Carter, Resident Financial Planner at Financial Finesse & Lead Author of the Financial Finesse Generational Research Report


Takeaways – How Did We get Here?

At the end of the day, there are a few things we can say for sure about the retirement predicament that we’ve gotten ourselves into:

      • The Great Recession had a devastating effect on the average person’s net worth.
      • The lack of financial literacy in this country contributed to both the severity of the economic downturn and the bleak retirement outlook.
      • We weren’t managing our money responsibly from either an everyday spending or retirement planning perspective prior to the recession.
      • Our fate is not yet sealed.  With increased education, values adjustments, and a bit of strategic planning, we can divert our course from a rocky retirement to a secure one.

 


What Can We Do About It?

Most of us need not be resigned to a lifetime of work, with no respite during our so-called glory years.  There is still time to revamp our financial plans in order to secure a comfortable retirement, even if it might neither come as soon as we’d previously hoped nor offer quite the same type of lifestyle.

The question is how, and again we turned to leading retirement planning experts for advice.

I do not think that the Great Recession has sealed the fate of Gen X.  Born between 1966 and 1975, this generation, now aged 38-47, has about 18-28 years to improve their financial position, if they are willing to do so.  The answer may be a (government) program which promotes a message of personal responsibility.  In the 1996 best-seller, “The Millionaire Next Door,”  PhDs Thomas Stanley and William Danko documented that the key to financial security in retirement is to live below one’s means during working years, i.e., to constantly save for retirement.  Of course, this requires sacrificing today’s desires for future security, the choice that all generations have to make.  And Gen X has been given a wonderful savings tool that has not been available to prior generations, i.e., the Roth 401(k) plan, which can produce enormous amounts of tax-free wealth.  Simply, Gen Xer’s may have to work longer, spend less, and save more to insure a secure retirement, which is no different than other generations.

- Alan Sumutka – Associate Professor of Accounting at Rider University


Although the figures do look a bit bleak for Generation Xers, the optimist in me sees everything as an opportunity and while it certainly won’t be easy for Gen Xers, there are plenty of things they can do to make their retirement financially sound.  The key, as you indicated is financial literacy.  Many are not as financially literate as they need to be.  At one time their parents and grandparents were the beneficiaries of defined benefit plans, which required no thinking, but have gone the way of the dinosaurs and have been replaced by the defined contribution plans.  Now the only place for a Gen Xer to look for a helping hand is at the end of his or her own arm.  But this Is not a bad thing.  There are many valuable options available with 401(k)s including Roth 401(k)s.   Financial literacy will be very important because there are many choices that will need to be made in regard to individual 401(k) accounts and as with any investment, what is important is not what you make, what is important is what you get to keep.  Unnecessary fees can eat up earnings that should be compounding tax deferred or tax-free.

The recession certainly wreaked havoc on the savings of everyone, but it also provided an opportunity for savvy investors to take advantage of the recovery.  Time can be a Gen Xer’s friend with a properly diversified portfolio with low fees growing over time.

It is unlikely that government will provide for greater retirement benefits.  What they may do, however, is provide greater incentives, as they have in the past for people to use IRAs and 401(k)s to provide for themselves.  Financially educated investors will be able to use these incentives to their benefit.

Gen Xers also have been hurt by the fact that they have carried much more debt than is fiscally sound to do.  Some of it such as student loans is understandable, but getting mortgages and car loans more than they could handle should have taught them a lesson in the importance of money management.

My prognosis for the future is that there will be a great market in financial education and for advisors to help people meet these compelling needs.

- Steven Weisman – Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University


Gen Xers need to save more than previous generations. They face a higher retirement age than the baby boomers and there is tremendous uncertainty over the future level of Medicare benefits. And, Gen Xers live longer, requiring more money outside of Social Security. There are fewer traditional defined benefit pensions, requiring again more money than in the past outside of Social Security for people to be prepared for rising inflation, stock market fluctuations and living for a really long time. And, health care costs for uninsured events like nursing homes are rising faster than overall inflation.

The greater need to save more is not matched with a greater ability to save more than was the case for baby boomers. Gen Xers struggle in the labor market with high unemployment and more importantly with rising long-term unemployment, even before the crisis. Employers are providing less and less assistance (fewer retirement savings plans and fewer employer matches in those plans). And, Gen Xers are struggling with saving and investing just as much as baby boomers. They often do not take full advantage of employer matches and mismanage the risks associated with saving (too little money outside of a home, no regular rebalancing of an investment portfolio during market ups and downs, borrowing against a home to finance consumption instead of other investments, carrying costly credit card balances even when they have sufficient cash to pay off those balances).

- Christian Weller – Director of the Graduate Program in Public Policy at the University of Massachusetts, Boston


The time to start saving more for retirement is now.  Period.  With a Gen. Xer who is in his or her 50s, it is not out of the question to consider saving $500 to $1,000 a month and to invest it with a 10-15 year time span (i.e. relatively aggressively).  Many people have other funds that could be used earlier in retirement, and we have whole groups in society who intend to work, at least part time, into their 70s.  With the housing market turning up a bit, there is also the possibility of more people selling their houses and moving to less expensive areas.  When you think about it, there are alternatives, but of course, many do not wish to consider the obvious ones, as they involve disruptions to their lifestyles.

Save early.  Save more.  Save now.  Don’t wait.  Consider the plight of your parents and grandparents living on Social Security alone!

Even people with a defined benefit pension in the public sector need to think about supplemental savings that is more than nominal.  The ideal time to start is in your 20s or 30s, but it is never too late.

-Theodore Anagnoson  - Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara


I’m not altogether pessimistic as to the financial fate of Gen. Xers, as a cohort. I think that when we talk about cohorts, it’s easy to lose sight of the fact that they are made up of individuals. Clearly, many individuals will experience negative outcomes after leaving the workforce, but many others are on target to meet their financial goals (replacement rate values in the case of the Pew report). It’s important to bear in mind that Gen. Xers still have 20-30 years before they will retire, which puts them in a good position to make the most of the time they have to amass a suitable nest-egg. Also, strategies such as catch-up savings and postponing one’s retirement date by a few years can also make a big impact on one’s future retirement standard of living.

My feeling is that we haven’t done enough in previous decades to ensure that working adults have the necessary tools to invest wisely for the future. Here in the U.S., over the past couple of decades the burden of responsibility for managing one’s retirement finances has been shifted squarely onto the shoulders of the worker. But there hasn’t been a corresponding emphasis on educating individuals to understand to how navigate the pitfalls and opportunities associated with long-term investing. The prognosis for future generations could be bright, but any such scenario would involve starting to educate Americans about planning and saving at a very early age. Indeed, psychological studies have shown that attitudes toward planning and saving are malleable, and lessons learned in childhood have a measurable impact on financial responsibility decades down the road.

- Douglas Hershey – Director of Oklahoma State University’s Retirement Planning Lab


I’m a Gen Xer so I’m not writing off my generation just yet.  We have time to catch up, but we need to get serious about this retirement thing.  The recession has made an impact on people in a positive way, helping them see the pitfalls of taking on too much debt.  What remains to be seen is if this will result in permanent behavior change.  We need to save as much as we can for retirement – aim for 20% of your income.  Make sure you are capturing all the tax benefits of retirement saving and any benefits your employer offers such as matching a portion of your contributions.  Make sure you take on enough risk to beat inflation and rising health care costs.  Once you hit age 50, take advantage of catch-up contributions.

I’m more worried about future generations.  Young people just don’t see the need to save for retirement.  Job opportunities that lead to upward mobility and increased salaries that enable them save are getting harder to find.

I try to show them the power of compounding.  Many of the younger generations don’t remember how the markets did before the recession – they just remember how the stock market tanked when the housing market collapsed.  So I show them using numbers that if they start saving early, they will not have to take on as much risk as someone, say a Gen Xer, who starting saving much later.  But they will have a larger retirement portfolio than the Gen Xer simply because of the time factor.  The trick is finding a creative way to get this message across.  Putting the numbers on a PPT slide just is not going to be enough anymore.

- Eileen St. Pierre, Author of “The Everyday Financial Planner” website and a former Assistant Professor of Personal Finance at Oklahoma State University


Generation Xer’s still have time to recover. First, this group is close enough for retirement that it’s important for them to go through a planning process. Fewer than half of workers have calculated how much they need to save for retirement—and this is a critical first step.

They also just need to build good habits, saving through payroll deduction or through automatic withdrawals from their checking accounts, making sure to save pension distributions that they receive when changing jobs and choosing investments based on an appropriate asset allocation for long-term investing and paying attention to minimizing fees.

They are also far enough from retirement that choosing a job with better retirement benefits, increasing their rate of savings, or doing a better job with investments can make a tremendous difference. When saving more they should be looking for ways to save on a tax preferential basis. Many people fail to take advantage of making allowable contributions to a Roth IRA, for example.

- David Littell, Director of the New York Life Center for Retirement Income at The American College of Financial Services


Takeaways – What Can We Do About It?

    • Again, there is still time for most of the workforce to foster a secure retirement.
    • In order to do so, however, we need to rethink our spending, payment, and saving habits.
    • We also need to do a bit of homework when it comes to personal finance and retirement planning in order to minimize mistakes and prevent foreseeable problems down the road.  This is especially true in light of the move from defined pension plans to 401K retirement accounts.
    • While many people prefer to put their heads down and work as hard as possible for as long as it takes to retire, actually taking the time to figure out how much money you need for retirement, when you’d like to retire, and therefore how much you must be saving per month will make the process far more efficient as well as give you a tangible goal to shoot for and benchmarks to gauge progress.
    • After all, it’s easy to get wrapped up in the here and now.  If more people had specific retirement saving goals, U.S. consumers might not have opted racked up more than $82 billion in new credit card debt in the past two years alone.
    • While retirement policy reform is ultimately going to be necessary, we can’t let our ability to retire to depend on the potential availability of federal assistance. Rather, we should take it upon ourselves to make the best possible financial decisions every single day with the goal of amassing the financial reserves necessary to replace about 70% of our per-retirement annual income.

 
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