The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Rebekah Barsch
Less than half of Americans say they feel financially secure, according to Northwestern Mutual’s 2014 Planning and Progress Study. That instability can be particularly difficult for members of Generation X, many of whom are in the throes of juggling work and family responsibilities along with saving for retirement. Many have stopped dreaming of an enjoyable retirement while they manage today’s financial challenges, leaving it to financial professionals to help them stay focused on the end game.
A block and tackle strategy may ease some strains in the short term, but it can have unintended negative consequences, particularly in retirement. The study revealed that approximately 70 percent of 30- and 40-year-olds say their financial planning needs improvement. Fortunately, Gen Xers still have time on their side. They can help themselves by taking time now to develop a plan that uses an appropriate combination of investments, asset protection and predictable income to get them to and through retirement.
This combination of pervasive insecurity along with a significant planning time horizon speaks to an opportunity for financial advisors. Gen X is 70 million strong in the U.S. and members of this generation face a complex financial puzzle. Still reeling from the financial crisis, they are struggling to rebuild a nest egg while also meeting day-to-day expenses that include credit card debt exceeding $10,000 on average. Plus, some older Gen Xers have aging parents, so they also need to think about issues such as long-term care and estate planning.
In short, Gen X needs professional financial advice, and the combination of factors Gen Xers are juggling requires a holistic planning approach.
Gen X Investors Face Retirement Risks Too
Like their parents and grandparents, Gen Xers are not immune to external risk factors that, if ignored, can deplete the healthiest of nest eggs. An individual’s longevity, health care costs and potential long-term care needs can quickly erode a lifetime of savings. Similarly, market ups and downs, inflation and taxes, and the desire to leave a legacy can determine whether retirement lifestyle dreams ever materialize.
But even the oldest members of this generation have a way to go before retirement. As a result, they need to weigh these risks differently than their parents and grandparents. The oldest Gen Xers are age 50 and have at least a decade ahead of them before retirement starts to seem real. The youngest of this generation are age 32, with their years of biggest earning potential still in front of them.
So, Gen Xers’ planning decisions should be geared to their particular circumstances. Unlike baby boomers - 10,000 of whom turn 65 every day – Gen X is in its working prime, with large savings gaps and scant prospects of a workplace pension. Therefore, they need to plan with long-term outcomes in mind. A prudent but confident approach is needed, meaning a diversified accumulation strategy that takes a tolerable level of risk in order to seize an opportunity without jeopardizing basic financial well-being.
Biggest Risk for the Xers: Not Saving Enough
This generation shouldered its share of economic hardships early on, leaving many worse off than their parents were at their age. Not surprisingly, the biggest risk facing Gen Xers right now – larger than any of the external factors mentioned earlier - is not saving enough to support their retirement goals. So, a combination of asset accumulation and the protection of those assets is the most critical step that Gen Xers can take now to boost the odds that they’ll have a big enough nest egg for retirement.
While the majority of Gen Xers are saving, they are not saving enough to meet future spending needs. According to the Insured Retirement Institute, half of Gen Xers have less than $100,000 in savings.
Simply saving more sounds easy, but if it were, more Gen Xers (and others) would be doing so already. Instead, financial concerns such as housing costs, children’s education and car expenses can understandably demand more immediate attention and resources. The key is for Gen Xers to devise a savings and investing plan that balances short- and long-term financial goals and suits their tolerance for risk, without also needlessly putting them in jeopardy of coming up short. Invest too aggressively and market gyrations could wipe out portfolio gains; likewise, playing it too safe on the sidelines could also mean a smaller-than-intended nest egg.
This is a tall order and something that Gen Xers should not feel as if they need to do on their own, although they should work with advisors who speak to their needs and not to the needs of their parents. Advisors working with Gen X should use generationally appropriate definitions of risk when coming up with portfolio management strategies and financial plans, and balance equities and fixed income allocations accordingly.
It’s Time to Start Talking About Asset Protection
No longer just starting out, it’s also time for Gen Xers to get serious about the role insurance can play. With a dozen or more years to go until the oldest Gen Xers retire, discussions about asset protection should begin now.
As was true of their parents, Gen Xer circumstances will change over time, so periodic reviews of assets and insurance will help determine whether they’re appropriately equipped.
First and foremost though, they must also take steps to protect their most important asset at this stage – their ability to earn an income. The impact of becoming sick, hurt or unable to work should be heavily factored into retirement planning for Gen X. A short- or long-term disability may result not only in lost income and the inability to contribute to retirement savings, but also to high medical costs and increased expenses today. Having an individual disability income insurance policy helps individuals replace a portion of their income lost as a result of a disability. This will put Gen X clients in a better position to meet ongoing financial obligations and maintain long-term financial goals.
Life insurance is also critical to a secure financial foundation. Life insurance protects families in the event of an untimely death, and it can be more than just a safety net. Depending on the type of policy, it can build cash value. Some policies have the opportunity to receive dividends, which can in turn be used to reduce premiums, increase coverage, or provide an income stream in retirement.
There are also some financial decisions that may be several years in the distance for Gen X. But planning can start now, including managing long-term care risks and whether to consider income annuities as one of several possible retirement income sources.
Get the Conversation Started
When the present consumes precious time and resources, it can be hard to think about the future until it is too late. Financial advisors can help time-strapped Gen Xers by inviting them into conversations about their retirement goals and dreams. With the finish line in focus, Gen Xers and their advisors can develop long-term financial plans that mitigate the risks that could wreak havoc on retirement if left unaddressed.
Rebekah Barsch is vice president, Northwestern Mutual.