Retirement planning for Generation X: Key strategies as penalty-free withdrawals begin

Generation X, often referred to as the “forgotten generation,” faces a distinct set of challenges when it comes to retirement planning. Unlike their predecessors, Gen Xers are the first generation to rely heavily on 401(k) plans as their primary retirement savings vehicle. This shift from traditional pension plans has placed a greater burden on individuals to manage their own retirement savings, including determining how much to save, how to invest and when to withdraw funds.

Several factors have contributed to Gen X's retirement planning challenges. They include:

• Limited access to traditional pensions. The decline of defined benefit pension plans has left many Gen Xers without the guaranteed income stream that previous generations enjoyed in retirement.
• Early 401(k) plan limitations. When 401(k) plans were first introduced, they lacked key features such as automatic enrollment and employer matching, which are now common. This may have resulted in lower participation and savings rates for early Gen X workers.
• High levels of student loan debt. Many Gen Xers entered the workforce with significant student loan debt, which may have hindered their ability to save for retirement early in their careers.
• Sandwich generation pressures. Gen Xers often find themselves supporting both their children and aging parents, stretching their financial resources thin and potentially impacting their ability to save for retirement.
• Economic volatility. Gen X has experienced multiple economic downturns, including the dot-com bubble burst and the 2008 financial crisis, which may have affected their career trajectories and investment returns.

These factors have contributed to a concerning trend: Many Gen Xers are approaching retirement age with insufficient savings. According to a recent study, the average retirement savings for Gen X households is approximately $150,000, far below the estimated $1.5 million required for a comfortable retirement.

As Gen Xers reach the age of 59½, many are facing the stark reality of their retirement readiness – or lack thereof. Recent surveys paint a sobering picture of Gen X's retirement outlook:

• Nearly half of Gen Xers (49%) worry that retirement may not be an option for them, up from 42% in 2021.
• Only 16% of Gen X members are "very" confident they will be able to fully retire with a comfortable lifestyle.
• Almost half of Gen Xers believe it would take a "miracle" for them to retire comfortably.
• One in five Gen Xers fears they won't be able to afford to retire even if they manage to save $1 million.
• Approximately 25% of Gen Xers are concerned that a shortage of savings will force them to return to work after retirement.

These statistics highlight the widespread anxiety and uncertainty that many Gen Xers feel about their financial future. The combination of inadequate savings, economic challenges and the responsibility of self-directed retirement planning has left many in this generation feeling unprepared for their golden years.

Despite the challenges, there are several strategies that Gen Xers can employ to improve their retirement outlook:

Maximize catch-up contributions

For those aged 50 and above, catch-up contributions allow individuals to save more in tax-advantaged accounts. In 2024, those 50 and older can contribute an additional $7,500 to their 401(k) plans, bringing the total annual contribution limit to $30,500. For IRAs, the catch-up contribution is $1,000, allowing a total annual contribution of $8,000. By taking advantage of these higher contribution limits, Gen Xers can accelerate their retirement savings in the crucial years leading up to retirement.

Consider Roth conversions

As Gen Xers approach retirement, exploring Roth conversions can be a valuable strategy for managing future tax liabilities. A Roth conversion involves transferring funds from a traditional pre-tax retirement account to a Roth IRA, paying taxes on the converted amount in the year of conversion. This strategy can be particularly beneficial for those who expect to be in a higher tax bracket in retirement or who want to reduce their required minimum distributions (RMDs) in the future.

When considering a Roth conversion, it's essential to evaluate factors such as:

• Current and anticipated future tax brackets.
• Overall financial situation and ability to pay taxes on the converted amount.
• Timing of planned withdrawals (withdrawals within five years of conversion may incur penalties).
• Long-term financial goals and estate planning considerations.

Develop a strategic withdrawal plan

As Gen Xers become eligible to access their retirement accounts without penalties, developing a strategic withdrawal plan becomes crucial. Financial professionals often recommend a specific order for withdrawing from different types of accounts to optimize tax efficiency:

• Start with taxable accounts.
• Move on to tax-free Roth accounts.
• Tap into tax-deferred accounts last.

This sequence can be adjusted based on individual circumstances and tax situations. Working with a financial professional can help create a personalized withdrawal strategy that maximizes retirement income while minimizing tax liabilities.

Delay Social Security benefits

While Gen Xers turning 59½ in 2024 are still several years away from Social Security eligibility, it's important to consider the impact of delaying benefits. For each year benefits are delayed beyond full retirement age (up to age 70), the monthly benefit amount increases by 8%. This can result in a significantly higher lifetime benefit for those who can afford to wait.

Explore part-time work or phased retirement

Given the concerns about insufficient savings, many Gen Xers may need to consider working part-time or pursuing a phased retirement approach. This can help bridge the gap between savings and retirement needs while also providing structure and purpose in the early years of retirement.

Reassess investment strategies

As retirement approaches, it's crucial for Gen Xers to reassess their investment strategies. This may involve:

• Adjusting asset allocation to balance growth potential with risk management.
• Considering income-generating investments such as dividend-paying stocks or bonds.
• Exploring annuities or other products that can provide guaranteed income streams.

Focus on health and wellness

Health care costs are a significant concern for retirees. Gen Xers can potentially reduce future health care expenses by prioritizing their health and wellness now. This includes maintaining a healthy lifestyle, staying physically active and addressing health issues proactively.

Educate yourself on financial concepts

The Natixis study revealed that many Gen Xers have limited understanding of key financial concepts. Improving financial literacy can lead to better decision-making and more effective retirement planning. Resources such as financial education courses, retirement planning workshops and reputable financial publications can help Gen Xers enhance their knowledge and confidence in managing their retirement finances.

Given the complexities of retirement planning and the unique challenges facing Generation X, seeking professional guidance can be invaluable. However, data from a recent BlackRock survey shows that only 40% of Gen Xers consult financial professionals for retirement planning, despite having larger savings compared to younger generations.

Working with a financial professional can provide several benefits:

• Personalized retirement planning strategies tailored to individual circumstances
• Objective analysis of retirement readiness and potential shortfalls.
• Guidance on tax-efficient withdrawal strategies and Social Security optimization.
• Assistance in navigating complex financial decisions, such as Roth conversions or long-term care planning.
• Regular reviews and adjustments to retirement plans as circumstances change.

As the oldest Gen Xers reach the age of 59½ and gain penalty-free access to their retirement accounts, it's clear that many face significant challenges in achieving their desired retirement lifestyle. The combination of inadequate savings, economic volatility and the shift to self-directed retirement planning has left many feeling unprepared and anxious about their financial future.

However, it's important to balance this realism with a sense of optimism and proactive planning. While the road ahead may be challenging, there are still opportunities for Gen Xers to improve their retirement outlook:

• Maximize savings in the remaining working years. With potentially 5-10 years left in the workforce, Gen Xers can make significant strides in boosting their retirement savings through aggressive saving and catch-up contributions.
• Leverage financial strategies. Techniques such as Roth conversions, strategic withdrawal planning and optimizing Social Security benefits can help maximize retirement income and minimize tax liabilities.
• Embrace flexibility. Being open to alternative retirement scenarios, such as part-time work or phased retirement, can help bridge financial gaps and provide a sense of purpose in the early retirement years.
• Prioritize financial education. Improving financial literacy can lead to better decision-making and more confidence in managing retirement finances.
• Seek professional guidance. Working with a financial professional can provide personalized strategies and objective analysis to help navigate the complexities of retirement planning.

As Generation X approaches this significant milestone, it's clear that the traditional notion of retirement is evolving. By acknowledging the challenges, embracing new strategies, and remaining adaptable, Gen Xers can work towards creating a retirement that aligns with their unique circumstances and aspirations. While the path may not be easy, with careful planning and proactive management, many in this generation can still achieve a fulfilling and financially secure retirement.