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Why Generation X Won't Retire Rich

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Retirement savings took a huge hit during the financial crisis and market meltdown five years ago, with savers of all ages feeling the brunt of plunging markets. But members of Generation X -- those born between 1966 and 1975 -- suffered the worst declines in their net worth from the crisis and saw the least recovery in the years that followed.

As a result, Gen-Xers are in bad shape when it comes to retirement readiness, as a recent study from the Pew Charitable Trusts concluded. With only enough financial resources to replace half of their pre-retirement income, the key question for Gen-Xers on the whole isn't how financially secure their retirement will be, but rather whether they'll be able to retire at all.

The fallout from the Great Recession
The most unfortunate thing about the plight of Generation X is that prior to the financial crisis, Gen-Xers were doing relatively well. As the study showed, by the time they reached their late 30s and early 40s in 2007, Gen-Xers had done a better job than the late-boomers born a decade earlier in building wealth, with a median net worth of more than $75,000 besting their older counterparts by more than 20%.

Unfortunately, the combination of the housing bust and the stock market plunge hurt Gen-Xers' net worth a lot more than more conservatively invested older generations. From 2007 to 2010, typical Gen-Xers lost 45% of their net worth, dropping their wealth levels below $42,000 in just three years. Although older generations took larger hits on a dollar-value basis, the larger amounts they had managed to save up meant that their typical losses were within the 20% to 30% range.

High debt levels have been a key element in holding Generation X back financially. From 2001 to 2007, Generation X nearly tripled their debt levels, leaving them especially vulnerable to the financial disruption that the recession created. Moreover, although baby boomers have dramatically slashed their outstanding debt more recently, Gen-Xers haven't had the financial resources to do so, with only a modest drop of about 5% in typical debt levels from 2007 to 2010.

What will keep Generation X from retiring rich (or at all)
The more pervasive problem that Gen-Xers face is the dearth of financial assets within their investment portfolios. A disproportionate amount of Gen-X wealth as of 2007 was in the form of home equity, with typical Gen-X financial assets totaling less than $20,000 even before the market meltdown. When the housing bust wiped out much of Gen-Xers' net worth, taking an average of more than 25% off their pre-bust home equity, the lack of other assets became even more evident, and typical portfolio levels fell below $15,000 by 2010.

Yet a closer look shows huge disparities within the generational cohort. When you compare the members of Gen X who are best-prepared to retire with their worst-prepared counterparts, the gap is greater than that of any other generation in the study.

Still, even when you look at overall numbers, Gen X isn't getting the job done when it comes to getting ready for retirement. With private pensions disappearing and Social Security under threat, that paints a dire picture for the retirement prospects of Gen-Xers down the road.

How to travel the hard road ahead
The one thing Gen-Xers have going for them is time. With longer to prepare for retirement than baby boomers, making smart moves now could help many Gen-X members escape the fate of a poor retirement. In particular, consider these moves:

  • Investing better will be a key to Gen-X success in the roughly 20 years they have before reaching retirement age. Gen-Xers would do well to follow the examples of their younger Generation-Y peers, who have boosted their allocations to stocks despite expressing extreme discomfort about taking on financial risk. Taking on the heightened volatility of small-cap stocks through iShares Russell 2000 ETF (NYSEMKT: IWM  ) or similar ETFs might produce better long-term returns than Vanguard Total Stock (NYSEMKT: VTI  ) and other broad-market options, but many Gen-Xers are uncomfortable with either of those choices. Yet for the most nervous investors, even more conservative stock investments will likely beat out savings accounts and other near-zero-return alternatives. For instance, PowerShares S&P Low Volatility (NYSEMKT: SPLV  ) and iShares MSCI USA Minimum Volatility (NYSEMKT: USMV  ) are designed to hold stocks that have provided a smoother ride in the past, and although that doesn't guarantee low risk in the future, the strategy could be a more comfortable one for nervous investors.
  • Despite their financial challenges, paying off debt more quickly and saving more to invest will also be critical elements of a successful financial plan. In a tough job market, there's only so much that Gen-Xers facing unemployment or underemployment can do on that score, but even those who are more fortunate on the job front should look hard at boosting their savings.

Finally, cultivating a more independent mind-set when it comes to providing for retirement will leave Gen-Xers in the best position to handle whatever comes from the political front. Counting too much on current benefits from Social Security and Medicare could leave Gen-Xers reeling if those programs make much-anticipated cutbacks or go through extensive reforms.

Despite Generation X's dire retirement prospects, you aren't tied to your generation's fate. Regardless of what your peers do, if you take action now to shore up your finances, you can put yourself in far better position to be able to retire when you want.

Despite high anxiety among Gen-Xers, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Read/Post Comments (7) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On May 23, 2013, at 7:28 AM, bonjourmesamis wrote:

    Gen X will inherit baby boomer wealth and Gen y, well, too early to tell whether investing in stocks pays off - could be that aggression works against them 10-20 years before retirement just as with Gen X. One fact is there are a lot more people in the world with unlimited wants chasing limited resources. Each generation goes through its own set of circumstances, just happened that baby boomers had the most opportunity as they were poised to benefit when the world moved from the age of industry to the age of information. All baby boomers had to do is to work hard and, with the slightest bit of financial conservatism (meaning a savings and investing plan), they were likely to succeed. A college education almost sealed the deal (those who sacrificed saw a payoff). Today, a college education is meaningless to financial success, in fact, it could be a huge hindrance. Probably better to spend you days devising a get rich scheme and taking a long shot rather than save and invest for 40 years only to have inflation or wealth destruction periods take it all back.

  • Report this Comment On May 23, 2013, at 10:37 AM, KombatKarl wrote:

    I'm a GenXer and maybe I got lucky. I don't feel like I'm bad off at all. Maybe because I continued investing through the 2008 meltdown and get the full benefit of the recovery. We also never looked at our home equity as a piggy bank.

  • Report this Comment On May 23, 2013, at 8:18 PM, damilkman wrote:

    Regardless if you are baby boomer, Generation X, or Generation Y, if you do not save incrementally and live within your means you will not have enough for an adequate retirement. It may be that beginning with Generation X people felt they had to have every toy. Regardless of what you make there seems to be yet another toy being pushed on us we must have.

  • Report this Comment On May 24, 2013, at 5:57 PM, The1MAGE wrote:

    When the market plunged, so did my portfolio. My response was mostly "whatever" though I did wish I had more money to put into the market at the time.

    About 2 1/2 years later, my account was up 50% over the pre-crash. This did include company contributions, but all our money was going toward paying off debt at the time. We got out of debt then, started contributing, and as a result the account had doubled in 2 years.

    I attempted to talk another person out of pulling his money out of the market at the time, but failed. He lost money, and didn't need to.

    For the people who lost money in real estate, what did they really lose, and why? If your house went down in value, you still have the same house. If you were selling it at the time, and couldn't wait, you should have been able to buy another house to replace it with one with a similar drop in price.

    Investment real estate? Just like stocks, why sell? The economy actually increased available renters.

    A lot of people were hit financially, but I have to say most of them was because they did stupid stuff. And no I am not immune to that, otherwise I wouldn't have spent years paying off debt.

    One stupid move? Ever taking a mortgage from the secondary market instead of the primary. If your too high a risk to pay a regular mortgage, why would you think paying a larger interest rate would be less risky?

    Then all the people who got into flipping without knowing what they were doing.

    During the market drop, I saw an interview with a person who pulled out close to the bottom, and was going to jump back in when the market recovered. Does anyone see a flaw in this reasoning?

  • Report this Comment On May 25, 2013, at 11:30 AM, devoish wrote:

    From the overview of the article,

    It appears that Early Boomers - Those born between 1946 and 1955, and who began their working years between 1966 and 1976, when minimum wage was at an all time high as a percentage of US income and union participation was above 30% are "approaching retirement in better financial shape than the age groups that came before them".

    Late Boomers, born between 1956 and 1965 began working in 1976 to 1986 while minimum wage was not keeping up with income gains or productivity and US and State Governments began their assault on unions with Right to Work laws.

    Generation X, born between 1966 and 1976 began working in 1986 to 1996, well after union participation had dropped to below 25% and down into the teens.

    It is hard to save, invest, or retire when you are underpaid.

    It is also showing to be a bad idea to pin your retirement hopes on investing. The vast majority of us would be better off investing our time and money into funding Medicare and SSI so criminals in the investment injury do not have access to stealing it.

    "How would you like to invest $10,000 and watch it grow over 20 years into $1,461,920? Well that's what happened at the giant hedge fund, SAC Capital Advisors, which made a 30% return for 20 years in a row.

    How is it possible to make such profitable investments again and again and again? The U.S. Attorney for Manhattan, Preet Bharara, believes he has the answer: SAC is cheating ... again and again and again. In fact, Bharara suggests that hedge funds that engage in insider trading may be rotten to the core:"

    Best wishes,


  • Report this Comment On May 25, 2013, at 11:33 PM, CPTBlast wrote:

    Maybe. Maybe not. A lot can happen in 20 years-including WWIII. In which case everyone loses. But as an Xer I'm doing OK, thanks very much. But mostly through living below my means, faith to keep me from not freaking out when the Market goes bear, and some luck to include using The Motley Fool as an investing resource.

  • Report this Comment On May 28, 2013, at 8:38 AM, Riddick100 wrote:

    Interesting. Generation X is a book by Douglas Copeland referring to those born 1960-66

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