If you believe the stereotypes, anyone born from 1965 to 1980 is a cynical job hopper who's also fiercely independent, thanks to a latchkey childhood. Meet Generation X, the "middle child" between baby boomers and Millennials -- as well as the generation that's facing a crossroads with respect to retirement readiness.
A recently published Retirement Savings Assessment by Fidelity gauges how well Americans have prepared financially for leaving the workforce. In 2020, the report shows that while baby boomers and Millennials are mostly on track with their retirement savings, Generation X is slightly behind. Fidelity calculates a retirement score for each group, representing how well that generation is predicted to cover retirement costs. Baby boomers and Millennials scored 87 and 82, respectively. Generation X had the lowest score of 80, down from a 2018 readiness score of 83. Generation X was the only generation to show a decline in retirement readiness.
What does this mean for you, Gen Xer? It's time to step up and take control of your retirement savings. Thankfully, the timing is right to take some key actions and secure the retirement you want. Here's what to do now.
1. Increase savings contributions
According to the Fidelity assessment, Generation X retirement savers tuck away 9.7% of their income on average. That's a decent savings rate, but you'll benefit greatly from increasing it to 15% or 20%.
Pew Research Center calculates the average annual Generation X household income at $85,800. At that income, increasing retirement contributions from 9.7% to 15% equates to an additional $4,500 of annual savings. And if you save it in a tax-advantaged account earning 7%, you'll have an extra $65,980 on your balance sheet after 10 years. If you have 15 years before retirement, you can amass an extra $120,800.
As you increase your savings contributions, keep an eye on the contribution limits. If you have a 401(k), those limits are generous. In 2020, you can contribute up to $19,500. And those of you over the age of 49 can make an additional $6,500 in catch-up contributions. At a 15% savings rate, you won't hit those contribution limits unless your salary is more than $130,000 if you're younger than 50 and $173,333 if you're 50 or older.
If you have access to a Health Savings Account (HSA), you can contribute another $3,550 in an individual HSA or $7,100 in a family HSA. Add $1,000 to those limits if you are 55 or older.
You'll have to get creative with your savings if you don't have a 401(k) or a HSA. First, max out your IRA contributions. In 2020, you can deposit up to $6,000, or $7,000 if you're 50 or older. After you reach those caps, start saving in a taxable brokerage account and invest in tax-efficient, exchange-traded funds. You will have some tax implications as these assets grow, but you're absorbing those taxes now to secure your retirement. It's worth it.
2. Maximize income
There are obvious benefits to increasing your income. Of course, a higher check frees up more cash for retirement savings. But it also raises your Social Security benefit. Your monthly Social Security benefit is determined by an average of your income in your highest-paid 35 years of working. You can raise that average by securing raises now and in the future.
If the best opportunities are outside your current employer, check in on how a job change affects your retirement and health benefits. Ideally, a new job would come with a higher salary plus an improved 401(k) plan, access to a HSA, and reasonable health coverage. Even so, you lose matching contributions in your 401(k) from your current employer. Consider that in your decision. A substantially higher salary and improved benefits might be a good trade-off -- as long as you commit to using the raise to fund the 401(k) and replenish those lost contributions.
Get serious about retirement saving now
You should be at or near your peak income years, which is an ideal time to get serious about retirement savings. Fire up that generational independent streak, raise those contributions, and look for bigger opportunities at work. That's how to make measurable progress in your retirement portfolio balance in the next 10 or 15 years.