As Gen Xers approach retirement age, with some already nearing 60, questions arise about their preparedness for the future. When surveyed, many Gen Xers expressed a desire to retire around 63. However, this leaves little time for older members to accumulate the necessary funds.
According to the latest data from Natixis, an investment bank, the average median retirement savings for Gen Xers is $81,000. Unfortunately, this amount falls far short their envisioned comfortable retirement goal of $1.2 million. Fidelity advises individuals to save at least 15% of their pre-tax income annually for retirement, including any employer contributions. However, this guide assumes that saving begins at 25 and continues until 67. To achieve the definition of a comfortable and happy retirement at the age of 65, Gen Xers would now need to save an average of $59,000 per year.
Experts and retirement calculators generally recommend having a retirement fund of three to six times one’s annual gross income before retirement by the age of 50 or six to 11 times one’s salary saved by the age of 60 to be considered on track for retirement. The specific amount needed depends on factors such as paying off the mortgage before retirement, downsizing or relocating, and individual spending habits.
Planning for a fulfilling retirement with limited time presents challenges. Some individuals may assume that Social Security benefits will sufficiently support them, considering any personal savings as a bonus. However, this notion is often misleading.
To qualify for full Social Security benefits, one must reach their full retirement age (FRA), which, for Gen Xers, is 67 years old. Furthermore, the benefit amount is determined by current earnings. Gen Xers are approaching retirement age at a time when social security has been rumored to be cut.
For those with average wages, Social Security benefits typically account for only about 40% of their pre-retirement income. This is why having a retirement fund of $81,000 would not be sufficient. Withdrawing 4% of this amount annually would result in a mere $3,240 of yearly income.
If an individual has at least ten years until retirement, investing their money for a higher return becomes an option. However, this may require adopting a more aggressive investment strategy, which carries higher risks, especially regarding retirement funds.
For instance, a 57-year-old with an $81,000 retirement fund manages to invest $500 per month for a decade until retirement could accumulate a decent sum. Assuming an average annual return of 8% (slightly below the current stock market average but higher than a more conservative estimation), the total could reach approximately $262,000. Withdrawing 4% annually from this amount would yield nearly $10,500 yearly income.
The “4% rule” is a traditional retirement savings strategy advising individuals to withdraw no more than 4% of their retirement fund each year to ensure longevity.
Younger Gen Xers still have time on their side and can potentially accumulate more savings over the years. For instance, by setting aside $500 monthly for 24 years (assuming an initial fund of $81,000), they could amass around $914,000 by retirement age, based on an 8% return. A 4% withdrawal rate would provide an annual income of approximately $36,500.
Therefore, if Gen Xers fall short of their desired retirement savings, it is crucial to explore investment options that offer better returns while being mindful of the associated risks, particularly regarding aggressive investing. The growth of your retirement fund should also be considered in light of factors that may diminish it.
David Lukas, Founder, and CEO of David Lukas Financial, emphasizes the significance of implementing a solid tax plan before retirement. Failure to comply could result in tens or hundreds of thousands of dollars in losses.
Another approach to alleviating the burden on available retirement income is considering a move to one of the 15 states that do not tax pension payments. This can help stretch your funds further and provide some relief in terms of taxation.
No matter how dire the current state of your retirement plan may seem, there are always ways to get it back on track. It’s never too late to reassess your financial strategies, seek professional advice, and adjust your savings and investment approach. With careful planning, discipline, and a proactive mindset, Gen Xers can take steps to secure a more comfortable and worry-free retirement.
In conclusion, the need for Gen Xers to increase their retirement savings is evident. With the average median retirement savings falling far short of the desired amount, it is essential to explore various investment options, be mindful of risks, and consider factors that can impact the size of the retirement fund. Gen Xers can work towards a more secure and fulfilling retirement future by implementing innovative financial strategies, seeking professional guidance, and staying proactive.