Gen X's pedal-to-the-metal moment in saving for retirement

The final 10 or so years of a career are crunch time for making the strongest possible push to bolster a retirement nest egg. 

With a last chance to feather their financial nests, savers whose earnings were whittled down through homebuying, college and major life events like layoffs, divorce or illness face mounting pressure to stockpile more dollars. 

The ticking clock also puts the heat on financial advisors, who have a relatively short window to maximize a client’s retirement portfolio.

“Generation X seems to make up a larger portion of people coming into the firm now looking for help,” said Derek Amey, the co-chief investment officer at StrategicPoint Advisors in Providence, Rhode Island.

The oldest members of Gen X, born between 1965 and 1980 and now aged 43-58, are a big test of the wealth management industry’s ability to skillfully help plan for retirement, according to the Society of Actuaries.

With the roughly 63 million generational cohort less like the boomers that precede them and more like anxious millennials, Gen X is heading toward retirement with higher student loan debt, less access to defined benefit plans and, often, lower savings, according to the actuarial trade group. While nearly 1 in 4, or 22%, have over half a million dollars in savings and investments, an equal amount report having less than $10,000 — virtually the same as millennials.

‘Bermuda Triangle’
David Johnston, the managing partner of Amwell Ridge Wealth Management in Flemington, New Jersey, said one family client was in “The Bermuda Triangle of financial planning.” Todd, a national sales manager for a mid-size technology firm, and Kelly, a bank risk manager, both turned 50 last year. They have one child in college and two soon to head off — one next fall, the other in two years. Their parents, who are in their mid-to-late 70s, increasingly have health problems.

“They now realize the window to save money for retirement is shrinking by the year — and you have one stressed out family,” Johnston said.

The couple has a combined household income of around $425,000 and will pay out of pocket for half their children’s education costs (the other half will come from 529 plans). They have just over $1 million in retirement savings, along with $250,000 in cash and other investments. 

During the pandemic, the couple used discretionary income that would have gone to dining out and vacations to pay off their credit card debt, refinance their 30-year mortgage to a 20-year loan at 2.5%, bought the car they were leasing and ramped up their 529 contributions 

“They really set their eyes on retirement planning,” Johnston said.

One big avenue: their employer-sponsored retirement plans. For people 50 and older like Todd and Kelly, the contribution limit this year for 401(k)s is $30,000, vs. $22,500 for those 49 and under. 

At age 50, the couple likely has at least 15 working years left, not 10. But whatever the runway, savers over that age should step on the savings gas pedal, Johnston said: “Most of our clients are doing all they can to take advantage of these increased limits.”

Employer-sponsored retirement plans aren’t the only avenue, especially for savers who max out their annual contributions. Savers over age 50 can turn to their individual retirement accounts. This year, such people can put a maximum of $7,500 into all their IRAs combined. If an older worker maxes out that limit at $625 a month, the pot would grow to more than $94,300 after 10 years, assuming a 5% rate of return. 

If the dollars go to a traditional IRA, a person in the 24% tax bracket — meaning this year they earn between $95,376 to $182,100 — would owe tax at his ordinary rate on withdrawals, including required minimum distributions. If the entire pot is cashed out after 10 years, that person could owe tax at a higher 32% rate. But if the pot continues to grow after the person stops earning income through work, its tax rate would probably drop to a much lower rate.

Put that money into a tax-free Roth, which is funded with dollars on which taxes have already been paid, and there’s no tax bill on withdrawals or distributions. 

“Gen Xers, whose taxes will only be going up, need to get ahead of the taxes now,” Amey said, referring to historically low individual rates that are set to revert to higher levels come 2026. “The problem is they’re not taking advantage of the Roth.” He recommends clients head into retirement with at least $50,000 in a Roth, “to give you flexibility” with investment income.

Even people with a longer runway to retirement are moving now to ensure their golden years are comfortable.

Dan Perrino, a principal wealth manager in Bellingham, Washington, at Savvy Wealth, said he had a client couple in their mid-40s making a combined $225,000 a year. The pair has a net worth of around $1.75 million, including 401(k) savings and the value of their home in the Seattle area.

Perrino said he recently helped the couple open a joint brokerage account “that’s constructed less aggressively than their 401(k) portfolios” and holds exchange-traded funds, individual stock, municipal bonds and direct indexing funds. 

In addition, the couple is reworking its estate plan to blunt the impact of Washington state’s estate tax, which ranges from 10% to 20% and hits estates once they reach more than $2.193 million. By using a bypass trust, also known as a credit shelter trust, for example, the couple can effectively double their exemption. Assets are held in the trust to benefit the surviving spouse and, sometimes, other beneficiaries, so that when one spouse dies, the assets pass to heirs without being taxed in the surviving spouse’s estate, thus “bypassing” the surviving spouse’s taxable estate.

“I’ve seen this line of thinking becoming a trend across many of my Gen X clients, especially those who have seen their real estate equity greatly increase,” Perrino said. “In my view, Gen Xers are looking to maximize their remaining years, while also considering their retirement income needs.”