|
Gen Xers have long had the reputation of being lazy,
misguided slackers.
When it comes to saving for retirement, however, studies
show that this may be an undeserved distinction.
"In comparison to previous generations, (generation X)
is doing well. They are focused on the need to save for retirement at an early age,"
said Paul Yakoboski, senior research fellow at the Employee Benefit Research Institute
(EBRI).
 |
"In comparison to previous
generations, (generation X) is doing well. They are focused on the need to save for
retirement at an early age."
|
| Paul Yakoboski,
senior research fellow at the Employee Benefit Research Institute (EBRI). |
|
Here's a look at some of the factors that caused the 1999
Scudder Kemper Generation Study to call generation X, folks born between 1965 and 1976,
one of the "most fiscally responsible and sophisticated (generations) in
memory."
Retirement on Their Shoulders
Many gen Xers realize they're responsible for their own
retirement.
Scudder Kemper found that 71% of gen Xers regularly save
some of their income. Surprisingly, that's on par with folks in older generations who
presumably have higher incomes. About 76% of baby boomers (folks born between 1946 and
1964) and 72% of the World War II generation (folks born before 1933) save some of their
income.
The leading reason gen Xers save is that few expect the
volatile Social Security system to provide adequate retirement income, according to EBRI's
1999 Retirement Confidence Survey. EBRI's 1998 Survey also reported that only 3% of gen
Xers expect Social Security to be an important source of retirement income, with most
counting on personal savings. At the same time, about 16% of older baby boomers, those
born between 1946 and 1953, expect Social Security to be the most important source of
retirement income.
Children See, Children Learn
Another major factor behind gen Xers' outlook is their
parents' experience.
Scudder's survey found that 36% of gen X respondents, the
largest group, listed "observing how my parents addressed money issues" as the
main factor shaping their savings approach.
When certified financial planner Kay Shirley interviews
younger clients she asks why they save. "I find one of two answers. Either, 'my
parents are doing great, they taught me' or, 'they're doing terribly and I don't want to
be in that mode,'" she said.
The latter is the reason Steve Hess, 36, and his wife Lisa,
32, save diligently. "My parents have money pressures. I don't want that," Hess,
a firefighter, said.
Using Technology to Boost Returns
Many gen X savers are using technology to build decent nest
eggs.
This group feels comfortable researching investments
online, and quickly turning that research into action, said Chris Cumming, vice president
of marketing at Diversified Investment Advisors.
"Ten years ago, the only way to invest was to use a
stockbroker. Today, I go home, dial the Internet, look at a financial profile, click to my
brokerage, and buy the shares," Cumming said.
Laura Cohn, a 30-year-old writer, provides a perfect
example of one of these tech-savvy investors. When asked for her portfolio balance, she
replied, "hang on, let me check it out online."
Tax-deferred Savings: Gen Xs' Best Friend
Easy and early access to tax-deferred savings plans has
also helped this generation get a fast start.
A 1999 study, by the Profit Sharing/401(k) Council of
America, found that 70.4% of all employees age 18 and older, and 75.7% of those employed
full time, have a retirement program in their benefits package.
Hess has been saving into his 457 plan (a
defined-contribution plan for state and local government workers) since he was hired as a
firefighter about 10 years ago. He and his wife, who contributes to a 401(k) plan,
together have about $100,000 saved for retirement.
Cohn, on the other hand, started late in thinking
consciously about saving. Her father, Buzz, set up her IRAs with bat mitzvah money, and
they're now worth about $30,000. A few years ago, she dumped a little money into her
then-employer's 401(k) plan.
Reality hit home this year. Cohn hit her 30s and her
60-year-old parents made the classic retirement move of putting a down payment on a place
in Florida. "Turning 30 was very traumatic...I just realized it was time to do
something," she said. She now contributes the maximum allowed to her 401(k) plan.
|
"Turning 30 was very
traumatic...I just realized it was time to do something."
|
| Laura Cohn,
30-year-old saver. |
|
Also boosting 401(k) participation rates is the growing
trend by employers to automatically enroll workers in the plans, said Olivia Mitchell,
professor of insurance and risk management at the Wharton School of the University of
Pennsylvania.
According to the PSCA's Automatic Enrollment 2000 Survey,
companies reported an average participation rate of 76% before automatic enrollment and
93% after automatic enrollment. The average rate of 401(k) participation industry wide is
80%.
Outlook Not All Rosy
Before your vision of this generation turns too rosy,
consider that many gen Xers are saving for retirement without a realistic game plan. They
don't know how much they need; they expect to take retirement early and they expect the
robust stock market to provide for them. This strategy recalls the old saying, "when
you don't have a map, you can end up anywhere."
According to EBRI's 1998 Retirement Survey, only 33% of gen
Xers attempted to figure out how much money they will need in retirement, compared with
about 50% of baby boomers.
About 41% of gen X workers expect to retire prior to age
60, EBRI reported in its 1999 retirement confidence survey.
Mitchell doesn't think gen X workers have prepared well
enough for retirement. She points out that many expect to build a $1 million nest egg,
retire prior to age 60, and have that carry them through old age.
But, what happens if they retire at age 55 and live another
30 years? Will that money be enough? Maybe not. Gen Xers often forget to take into account
rising life expectancy and advances in health care when planning for their financial
futures.
Indeed, Scudder's study found that 81% of gen Xers were
disheartened to hear how much money they will need for retirement.
Consequently, gen Xers have a non-traditional view of
retirement. Just because they're retired doesn't mean they'll stop working. About 69% of
gen Xers expect to work in retirement, EBRI said.
Unrealistic Investment Expectations
With such great savings rates, will generation X be able to
make it in retirement?
"I can't say if they will be self-sufficient,"
Yakoboski said.
EBRI's 1999 Retirement Confidence Survey shows 37% of gen X
workers have saved between $10,000 and $100,000. Still, their final results could depend
on how the stock market performs.
For most of their lives, the stock market has gone up.
Currently, gen X investors expect an average 21% annual return, the Scudder study said.
It's an outlook bolstered by the S&P 500 Index's average annual return of 19% over the
last 10 years.
But, gen Xers are untested when it comes to dealing with a
falling market and a declining return on their investments. They could be in for a nasty
surprise — over the final two thirds of the 20th Century, the S&P 500 posted a
more modest average annual return of 13.5%.
 |
