You Must Chill. Generation X’s Retirement Problem Is Not as Bad as You Think

It’s not all doom and gloom, folks. You probably have more saved for retirement than CBS thinks — and there’s still time to save more. Defined as the American cohort born between 1965 and 1980 (by Encyclopedia Britannica), or perhaps 1960 and 1978 (according to Douglas Coupland), Generation X has never been easy to pin down. It’s also a generation feeling particularly un-easy about retirement. Depending on how you define it, the leading edge of Gen X has either already qualified for early retirement (age 62), or is almost there. No matter how you define it, Gen X’s youngest members are well over halfway through their working years toward reaching that goal. Problem is, those of us in Gen X haven’t saved nearly enough money to afford to retire.

Are the statistics on retirement misleading?

That’s according to a recent report by CBS News, which says that most U.S. workers believe they need to save about $1.5 million in order to comfortably retire. The average Gen Xer, in contrast, has saved closer to $150,000. Keying off a report by Natixis Wealth Management last week, CBS said that anywhere from 20% to 25% of Gen X worries this isn’t enough cash to retire on (even with Social Security kicking in an average of $24,000 a year), and that we’ll have to keep working well past normal retirement age. But here’s the good news: CBS and Natixis are really only half right about how much we have (on average) saved — so they’re only half right about how bad the problem is. Put another way, you’re probably not quite as doomed as the headlines make you think. Consider: The Motley Fool recently summarized data from the U.S. Federal Reserve, which (among other things) keeps track of the state of Americans’ finances. According to this report, the average net worth of Americans aged 45 to 65 is closer to $300,000 than to $150,000. How to explain this discrepancy? It’s simple, really. The average liquid cash, stocks, and other assets that Gen Xers have tucked away into retirement nest eggs may equal $150,000. But that doesn’t count the value of one of our biggest investments — the equity in our homes. Factor that in, and we have close to twice as much wealth available to fund a comfortable retirement.

Getting from $300,000 to $1.5 million

That’s not to say the problem isn’t serious. If we really do need $1.5 million to retire, then the average Gen Xer is still pretty far off the mark. But…what if we don’t really need $1.5 million? What if less is just fine? Let’s do the math. Assume you follow the usual rule of taking out only 4% annually from your 401(k), to ensure it lasts you through retirement. Well, 4% of $1.5 million is $60,000 — which should be plenty to live on in most places in America, since average per capita income is about $41,260, according to the U.S. Census Bureau. Retire with your spouse, and things get even easier, with the Census Bureau reporting that median household income is only $75,150 — $37,575 per person. And if that’s the case, then aiming to retire with $1.5 million in savings is probably overkill, especially with Social Security covering more than half the bill. Even for a single retiree, covering the gap between $24,000 in Social Security and $41,260 in living expenses should require savings of “only” $431,500. At a 4% withdrawal rate, that should cover the $17,260 difference.

$431,500: Your new magic number

All this being said, according to CBS, about 40% of Gen X “hasn’t saved a penny for their retirement.” So let’s take a worst-case scenario and assume they likewise have no home equity to cushion retirement. They’re renting, and so literally have no retirement plan beyond depending on the benevolence of the U.S. government. Still not all hope is lost. Assume we’re working with a mid-age Gen Xer here, born smack dab in the middle of the cohort — 1972 — and aiming to retire at the full retirement age of 67. That person still has 15 full years in which to make up for lost time. And as my colleague Ben Gran recently calculated for the Fool’s sister publication The Ascent, if someone starts at zero today but begins immediately putting away $1,000 a month, and keeps doing this for the next 15 years, they’ll retire with a staggering $738,979 in savings. Granted, that’s going to require some serious savings — about 30% of average annual income. It also gets you only halfway to $1.5 million. But as we’ve seen, you don’t really need $1.5 million in the first place. So chill out, Generation X. You may have slacked off before, but there’s still time to fix that. And if you need any advice on how, we’re here to help.