Future financial needs may be underestimated.
If you were born between 1965 and 1980, you belong to “Generation X.” Ten or twenty years ago, you may have thought of retirement as an event in the lives of your parents or grandparents; within the next 10-15 years, you will probably be thinking about how your own retirement will unfold.
According to the most recent annual retirement survey from the Transamerica Center for Retirement Studies, the average Gen Xer has saved only about $72,000 for retirement. Hypothetically, how much would that $72,000 grow in a tax-deferred account returning 6% over 15 years, assuming ongoing monthly contributions of $500? According to the compound interest calculator at Investor.gov, the answer is $312,208. Across 20 years, the projection is $451,627.
Should any Gen Xer retire with less than $500,000? Today, people are urged to save $1 million (or more) for retirement; $1 million is being widely promoted as the new benchmark, especially for those retiring in an area with high costs of living. While a saver aged 38–53 may or may not be able to reach that goal by age 65, striving for it has definite merit.
Many Gen Xers are staring at two retirement planning shortfalls. Our hypothetical Gen Xer directs $500 a month into a retirement account. This might be optimistic: Gen Xers contribute an average of 8% of their pay to retirement plans. For someone earning $60,000, that means just $400 a month. A typical Gen X worker would do well to either put 10% or 15% of his or her salary toward retirement savings or simply contribute the maximum to retirement accounts, if income or good fortune allows.
How many Gen Xers have Health Savings Accounts (HSAs)? These accounts set aside a distinct pool of money for medical needs. Unlike Flexible Spending Accounts, HSAs do not have to be drawn down each year. Assets in an HSA grow with taxes deferred, and if a distribution from the HSA is used to pay qualified healthcare expenses, that money comes out of the account tax free. HSAs go hand-in-hand with high-deductible health plans, which have lower premiums than typical health plans. A taxpayer with a family can contribute up to $7,000 to an HSA in 2019. (The limit is $8,000 if that taxpayer will be 55 or older at any time next year.) HSA contributions also reduce taxable income.
Fidelity Investments projects that the average couple will pay $280,000 in healthcare expenses after age 65. A particular retiree household may pay more or less, but no one can deny that the costs of health care late in life can be significant. An HSA provides a dedicated, tax-advantaged way to address those expenses early.
Retirement is less than 25 years away for most of the members of Generation X. For some, it is less than a decade away. Is this generation prepared for the financial realities of life after work? Traditional pensions are largely gone, and Social Security could change in the decades to come. At midlife, Gen Xers must dedicate themselves to sufficiently funding their retirements and squarely facing the financial challenges ahead.
Dave B. Rao is the founder of RAO Wealth Partners. He focuses his practice on helping to advise physicians, corporate executives and business owners on their unique financial situations. For more information, visit raowp.com.
Our firm does not render legal or tax advice. This article was written for our firm and provided courtesy of MarketingPro. Investments in securities and insurance products are NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Rao Wealth Partners is an independent firm with securities offered through Summit Brokerage Services, Inc., member FINRA and SIPC. Advisory services are offered through Summit Financial Group, Inc., a registered investment adviser. Summit is an independent broker-dealer with client assets held at First Clearing, LLC (a wholly owned Wells Fargo subsidiary). Summit and its affiliates are under separate ownership from any other named entity.