How Gen X Can Rescue Their Retirement

0:04How Gen X can rescue their retirement and some stock market optimism amidst high valuations. That and more on this Saturday personal finance edition of Motley Fool Money.

0:18I'm Robert Brokamp, and this week I speak with Kerry Hannon, co-author of a new book that lays out a retirement roadmap for members of Generation X, the oldest of whom turned 60 this year. But first, let's take a look back at last week in money. One comes from Fidelity's Urien Timmer, who sees today's market similar to that of early 1999. In other words, the later innings of a bull market, but perhaps another year or so of solid gains. He points out that the current bull market is being driven by actual earnings. The expected growth rate for third quarter earnings started out at 7 % year over year, but has jumped to 13%.

0:54Yes, valuations for the market-weighted U.S. stock market are lofty, but the P.E. for the median stock is not unreasonable. The higher PE for the cap-weighted indexes are, of course, due to the fact that the market is dominated by the MAG-7, which are not cheap and make up almost 40 % of the S &P 500. But Timmer believes that investors can find a good hedge against this concentration risk in cheaper international stocks. For another rosier view, we turn to Ryan Dietrich of the Carson Group, who recently pointed out that the S &P 500 was down more than 15 % by April of this year, but then rebounded and will likely end the year with double-digit gains.

1:31If that happens, 2025 will join 1982, 2009, and 2020 as the only other years since 1950 when this has happened. How did the S &B 500 perform in the calendar years after those previous three instances? It posted double-digit gains each time, with the median return being 17.3%. For our next item, we turn to a provision that took effect last year and allows unused money in a 529 college savings account to be transferred to a Roth IRA for the beneficiary. There are a lot of restrictions around this, including that the account has to have been open for at least 15 years. The amount that can be transferred in a single year cannot exceed that year's contribution limit for an IRA.

2:12The total amount that can be transferred is$35 ,000, and there are many other rules, so do your research before trying this. However, if you meet all the requirements, the transfer is free of federal taxes. But what about state taxes? Well, a recent article from Ian Berger at IRAhelp.com provided some clarification. Residents of the nine states that don't levy an income tax have nothing to worry about. 30 states have decided to go along with the federal rules. Three states, Colorado, Missouri, and New Jersey, haven't yet said one way or the other. California is the only state that has said a 529 to Roth transfer will not be tax-free on the state level.

2:50It will be subject to income tax and an additional 2.5 % levy. Also of note, some states allow residents to deduct contributions to 529s, but if you live in Indiana, Louisiana, Massachusetts, Michigan, Minnesota, Utah, or Vermont, you'll have to pay back that deduction if the money is transferred to a Roth IRA. What all this demonstrates is that if you live in a state that levies an income tax, check to see whether it will conform to any new tax laws passed by Uncle Sam, especially in light of all the new tax breaks in the one big beautiful bill passed in July. Now, the numbers of the week, and they are 2.8 % to 4.8%, which is what Vanguard expects as the range of annualized returns from the U.S.

3:32stock market over the next decade, according to a recent report, and down a half a percent from a few months ago. They expect 3.8 % to 4.8 % from U.S. bonds, so just about the same amount, if not a little better. The low expectations for U.S. stocks stem from high valuations that just keep getting higher. Vanguard expects somewhat better returns from small caps, value stocks and international stocks, but nothing near double digits. A recent report from JP Morgan Asset Management has a somewhat more optimistic take, with projected annualized returns of 6.7 % from U.S. stocks over the next 10 to 15 years, and also slightly higher returns from international stocks and around 5 % from bonds.

4:11Will these projections end up being accurate? Probably not, at least not exactly. But I do think it makes sense to assume lower future returns when you do any sort of analysis of your financial plan, such as, you know, using a retirement calculator to determine how much you need to save and when you can stop working. I've said on the show before that I assume a 6 % return when I run my numbers, but given the extraordinary returns we've had over the past few years and today's current valuations, I think I'll notch that down a percentage point. After all, I'm an older member of JetX, and we all should be taking careful stock of whether we are on track to retire how and when we want, which will be our next topic of conversation when Motley Fool Money continues.

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5:46future. Carrie, welcome to Motley Fool Money. Hey, it's great to be here, Robert. Thanks for the invite. Love the book. I love the fact that you have all kinds of great references to Gen X, I being an older Gen Xer myself. So let's start with just the stats. Generally speaking, how is Gen X doing when it comes to being prepared for retirement? Yeah, I mean, it's a great question because, of course, everyone's situation is different. But when we look at, you know, sort of the landscape of Gen X, there is this real sense that they're woefully unprepared for retirement. One in four don't have a retirement account.

6:25And three in five are not confident that they're going to have what they would consider a dream retirement and half believe that they're going to outlive their money. So this is not a good feeling. And And so there's this sense that they're woefully unprepared. And study after study has been kind of bubbling up with these kinds of statistics. But, Robert, here's the thing. They may not necessarily be unprepared, but even if they aren't, they think they are. And you know what? That's just a whatever Gen X kind of malaise, right? Exactly. I think one of the issues, of course, is that the way that American Safer Retirement has changed significantly over the past 50 years, just as Gen X was entering the workforce coming of age.

7:12What would you say are some of the changes that have had the biggest impact on Gen X? Yeah, Robert, I mean, you just nailed it. The biggest, biggest thing is the arrival of the 401k, just as they were getting started in the workplace. And so, you know, as pensions sort of faded away and 401ks came on the scene, nobody knew what these were. Nobody told us what they were. We didn't know how to invest in them or how, you know, it's like do-it-yourself investing the great experiment. And, you know, at that time, this was like the mid-'80s, there wasn't a lot of money you could actually set aside in these accounts.

7:51So there was this sense of, like, what are these, how do we manage this, and how do we do our own retirement savings? Many people, including myself, actually after five years cashed out a 401k plan because nobody told us not to. Like there just wasn't the financial education that's out there today. So I think that is the number one stumbling block. And if you look at the statistics, the average Gen Xer didn't start saving for retirement until age 31. When you look at millennials, it's more like 24. And Gen Z, even younger because of the... Today, we have these wonderful things called auto enrollment in these 401k plans and auto escalation.

8:34This didn't exist back then. Yeah, the 401ks came about, as you said, in the early 80s, but it took a while for them to proliferate. And they just weren't that great at the beginning. High costs, maybe two or three options. The contribution levels weren't that high. Same with IRAs. They came out in the 70s. Contribution limits were$1 ,500, moved up to$2 ,000, but still not a lot of money. I've talked about before that when I joined the Motley Fool back in 1999, our 401k wasn't very good. Because if you were a small new business, you just couldn't get a 401k. Fortunately, things are better now, but it's to a certain degree, maybe come a little late for Gen X.

9:14I don't know. I am hopeful. I don't think it's too late. And I think what my co-author, Jenna Heron, and I write in this book is sort of, hey, you got this, kids. I mean, this is the thing about Gen X. This is this scrappy, resilient generation that rode bikes without helmets and drank water out of the hose. and ate Pop-Tarts. We were just cool. And the thing is, we've been very resilient, latchkey kids. We know how to get it done. So it's a matter of focus and getting it done because Gen X was also hit pretty hard by some of the economic realities and setbacks over their careers. But in fact, the financial crisis in 2008, they bounced back faster than any other generation in terms of lost savings during that time.

10:01So I think we need to say, hey, you know, you got this, but let's get started. Let's find out how you take advantage of that runway ahead of you. I love that. I love to get to the solutions, but I do want to highlight just a few other challenges that they're confronting. So, for example, the classic sandwich generation, right? I just heard from a Motley Fool reader the other day. He's 55 years old, has a couple of preteen kids, but also has a mother with dementia. So he's finding it difficult to prioritize his retirement savings at this point because he's got both kids and parents to take care of.

10:37Social Security, you know, we don't know what's going to happen with that, but the trust fund could be depleted in less than a decade, depending on what happens. And then you also highlight in the book the levels of debt. Tell us a little bit about the levels of debt that Gen X has. Yeah, I find that it is quite concerning. And the point is, I'm so glad you brought up, you know, this cop between kids and caring for aging parents. But there's this thing called student loan debt. And Gen Xers have a lot of it. And they have more than most other generations. Some of it's their own student loan debt.

11:13Some is their children's student loan debt. But they also have, if you think back, this was the time when credit cards were just coming on the scene when they started in their working careers. Gen Xers got very adept with using credit cards in order to, you know, pay for things. It became a way of learning how to do this. And so I think what happened is over the years, you know, they were, you know, it didn't matter how much income you made, have another credit card. So they've run up pretty exorbitant amounts of credit card debt. And this is something that has got to be tackled, but it truly makes it difficult.

11:49When you have that revolving credit card debt to pay off and you have to decide, am I saving for retirement or am I paying off this high interest credit card? Chances are you're going to go for that credit card. Yeah. So as you point out, Gen X has the highest levels of student loan debt, credit card debt. Also, I looked at a report from Fidelity, looked at 401k loans. Gen X has the highest percentage of people with a 401k loan. One in four, Gen X has a 401k loan. But let's move on to the solutions. So we've highlighted a lot of challenges, but what do you think people should do? Yeah, I say you got this.

12:23Like, here's what you need. First of all, one super positive thing, Robert, is that most Gen Xers are in their peak earnings years. So, you know, this is a time in life where you do have income coming in. You have the cash flow in order to take control of this. So if you, in fact, are in this situation, you need to just boil it down. And we've had lifestyle creep, right? It happens. You may have done budgets when you're getting started in your working careers or were you buying your first home or something. But the fact is, you need to really get down and say, how is my lifestyle? You know, it kind of explodes in a way.

12:59So how do we get control of this? How can we, A, pay down that debt? Do we, you know, just go through and really be hard-boiled about it? And it's not easy to do. No one wants to do a budget, but it is really your first step in finding where you can make change happen. So those are the two things that I think are super important. The other thing is Gen X actually has quite a bit of home equity. So this is a positive that as you move forward, it's a possibility that you've got, you know, it's not in your retirement account, of course, but you have other assets that are in your favor to help you secure a potentially financially secure retirement.

13:36And also, I'm a big believer in work. So I don't think work is a four-letter word. This is a time many Gen Xers can say, okay, how can I extend my working life and phase into a retirement and do it in the way I want to do it? And if you start early enough, you can start imagining and dreaming about what that might be that you might want to do. It doesn't have to be peddled to the metal work, but it's a way to bring in that cash flow so you don't have to tap into those retirement accounts too early. They can continue to grow. You can push back Social Security, hopefully, to age 70, which we all say is a great idea if it works for you.

14:14So these are just also it's the mental and physical stimulation of staying engaged. But again, it doesn't have to be in what your primary career has been. You can do a career transition, but this doesn't happen overnight. I love the idea of working longer. I've mentioned on the show before that the studies that show whether retirement is good for us are actually mixed, you know, because we do get some value from work, as you point out. And you will also see people as they get older starting businesses. And so not only are you the co-author of Retirement Bites, but you are also the author of Never Too Old to Get Rich, The Entrepreneur's Guide to Starting a Business Midlife.

14:48So as our final question here, what tips do you have for anyone who's thinking, you know, I've always wanted to start a business. What should I start doing? Gosh, I love that. You know, the thing is, again, as I as I prefaced on some of these other things, it takes time to make this happen for you. But it is happening. And older entrepreneurs tend to be more successful and get better traction than younger ones for lots of reasons. They've got marketing savvy. They've got management savvy. They hopefully have some resources that they can tap to launch their businesses. And they have a network that they can call on upon to do it.

15:23And in today's world, the opportunity to start a business is so much easier because you can do it, you know, from the beauty of your and luxury of your own home office, often with your computer. You can, because of the growth in remote workers and contract workers, you can hire workers to, you know, to kind of cherry pick some people to come in once a month to do your bookkeeping. Somebody can do your social media strategy. You don't have to have a big staff in order to get your business off the ground. You can really manage your cash flow, your management team, all kinds of things. But in order to do it, I say go slow, no rash moves.

16:01You need to get financially fit because you may not be able to pay yourself immediately when you get started. So make sure you got that together. You know, do your homework. Talk to people in those industries that you're interested in. Where are the gaps? Where are the opportunities to start a business? It might even be a hobby of yours, which is not always the most successful of businesses because you're so close to it. But again, you might also, because it's your hobby, know where the niche is that needs to be filled and also have a network to sell to. You know, add skills and certification.

16:34Take your time. You can do this virtually. It's not a master's degree. Get a certification that helps you step into that field. And finally, give yourself an opportunity, if you can, to volunteer, moonlight, try it out on the side. Find a way to say, is this really a possibility for me? Is it as dreamy as I think it's going to be? And give it time to breathe and let yourself make a really clear decision. about what you're starting. And, oh, I did say that final, but this is the final one. Nothing lasts forever. So just get started. If you dream of being an entrepreneur, give it a shot. Because, you know, you might do something.

17:13I went back, I wrote another book called What's Next, Follow Your Passion and Find Your Dream Job. And these were a lot of entrepreneurs there. When I went back several years later to update that book, about a third of them had moved on to other things or sold those businesses and started something else. So this is a time in your career that's like a patchwork quilt. You might do something for a few years. You might do a couple things at the same time. So have an open mind and just get started. Well, Carrie, this has been an enlightening and, dare I say, nostalgic conversation. Thanks so much for joining us.

17:46It's time to get it done, fools. You know, we're heading into the holiday season where we'll be spending time with family and friends. I hope you'll be enjoying some good company, good food, and good gifts. but also take the opportunity to talk about a much less cheery topic with the important people in your lives and that is estate planning. And I say this in light of two items I read this week. One comes from the Wall Street Journal which told the tale of a married couple in their 70s. The husband managed all the finances but unexpectedly passed away leaving the wife overwhelmed by having to learn where everything was and how to manage it.

18:17And the other item comes from my foolish colleague Jim Mueller. A relative of Jim's was taking care of an elderly mother who has dementia including managing her finances. Sadly, this relative recently passed away at a relatively young age, and now Jim and his wife are taking over. But they're flying blind. They don't wear to find any of the estate planning documents, what bills need to be paid, where any accounts are, or how to access them. I know estate planning isn't the merriest of topics for the holidays, but take the time to talk with the people you expect to take over and fulfill your financial wishes if something happens to you.

18:51And if you expect to be fulfilling that role for someone else, encourage them to get an updated estate plan, which should include all the important information about all their finances, and find out where to find it if you need it. And on that cherry note, that's the show for this week. Thanks for spending part of your weekend with us, and thanks to Bart Shannon, the engineer for this episode. As always, people on the program may have interest in the investments they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell investments based solely on what you hear.

19:20All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Full on, everybody.