MW How Generation X can still retire

By Brett Arends

There isn't much time to turn things around

A new report says that most of Generation X--those now aged between 43 and 58--are now in deep, deep trouble for their retirements. The median household in the group has just $40,000 in savings. Nearly one household in three has exactly $0. Nearly two-thirds of the generation admit that they have saved less than 10% of their target number.

Among the reasons: Rising income inequality that wiped out a lot of good blue-collar jobs in the 2000s, and the global financial crisis of 2008-2010.

On the blue-collar jobs front, it's notable that in Generation X, across all income groups, the median divorced man has just $216 in retirement savings--barely one-sixth of the number for divorced woman (itself pitiful at $1,500).

As some in the generation are near retirement age, and all are now well into middle-age, there isn't that much time to turn this around. It's no surprise the report has gotten a lot of attention.

The report was published by the National Institute for Retirement Security, a prominent think-tank.

But contrary to what you may read, it's not all doom and gloom. Not entirely, anyway. And, yes, many or even most members of Gen X can still retire in dignity--so long as a few things happen.

First, about that report: While the numbers are shocking, they group together individuals across a 15 year age span. And those ages typically account for peak earnings years. Furthermore, while they count retirement savings, they don't look at total "net worth," which also includes housing equity. For those other than the very well-to-do, housing equity is typically their biggest asset.

NIRS also breaks down total net worth by age groups, and this tells a better story. The older you are in Gen X, and the nearer to retirement, the likelier you are to have at least some savings. Among those aged 53 to 58, the median net worth is just over $80,000. That's almost twice as much as it is for the youngest members.

Second, NIRS' data comes from December 2020. And that's important. Since then the S&P 500 $(SPY)$ has risen about 30%, even after accounting for a terrible 2022. The so-called "balanced portfolio" of 60% U.S. large-company stocks and 40% U.S. bonds $(AGG.AU)$ has risen 10%. And, most important, since that time U.S. home prices have risen 28% (according to the Case-Shiller index) and U.S. housing equity has rocketed 39& (according to the Federal Reserve).

The NIRS data show that more than two-thirds of older Gen Xers live in homes that they own. If they were able to refinance during 2020, when 30-year rates fell as low as 2.5%, they have a big cushion underneath them.

Factor in another two years' savings and the picture, overall, looks better. Or, maybe: Bad, but it could be much worse.

The real issue, as usual, is the inequality: Those earning the least are likely to have the least savings and home equity.

There is still time to turn this around for many of this generation, or maybe most. But a few things have to happen.

First, the jobs market has to stay reasonably good so this generation can continue to earn and save. As NIRS data show, the global financial crisis devastated Gen Xers' net worth.

Second, as many Gen Xers as possible need to be able to work until they are 70. That requires not only good health on their part, but concerted action by society at large, as well as politicians and others, to fight ageism. If businesses lay off everyone over 50, they won't be able to work until they are 70. And delaying retirement is critical: Claiming Social Security for the first time at 70 gives you a monthly check that is nearly 80% bigger than you'd get if you start claiming at 62.

Third, Gen Xers who have good jobs have to save, and save as much as they can--including maximizing the use of their 401(k) and IRA allowances.

One of the frustrating things in the NIRS data is to see that those who are self-employed typically have much lower retirement account balances than wage and salaried workers. The self-employed have access to two very generous and simple vehicles for tax-deferred savings: SEP-IRAs and Solo 401(k)s. I haven't yet met an Uber $(UBER)$ or Lyft $(LYFT)$ driver who's heard of either.

Fourth, financial markets have to produce good returns. If the S&P 500 index of large-company stocks, the S&P 600 and Russell 2000 indexes of small company U.S. stocks, and the EAFE index of international stocks generate average returns over the next 10 or 20 years near to their historic averages, namely inflation plus about 4% or 5% a year, those who are saving should be in much better shape.

Five, as many as possible should be able to pay down or pay off their mortgages--leaving them with minimal housing costs in retirement.

Sixth, politicians have to agree not to undermine Social Security or Medicare.

Seventh and finally, those retiring need to have the opportunity to maximize their incomes by annuitizing at good and safe rates. Good rates means the annuities pay a decent income. Safe means either the income is protected against inflation, or inflation remains benign. Annuities in theory are a great retirement vehicle, especially for those with inadequate savings. But the risk always remains that you lock in a low return for the rest of your life and then get walloped by high inflation, as happened in the 1970s.

In the late 19th century, Benjamin Disraeli, a British politician and famous wit, was asked at a dinner party to explain the difference between a calamity and a catastrophe. It would be a calamity, he replied, if his leading political opponent, William Gladstone, fell into the river Thames. But it would be a catastrophe, he added, if Gladstone were rescued.

Generation X's retirement situation looks like a calamity. Let's hope it doesn't become a catastrophe.

-Brett Arends

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July 24, 2023 11:59 ET (15:59 GMT)

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