Generation X, this is not your parents’ retirement plan.
Unlike our mothers and fathers, we Gen Xers — those born between the early 1960s and early 1980s — are more likely to have had access to employer-sponsored retirement plans such as a 401(k) or 403(b) from early on in our careers. Most of us who have gotten married and started families did so at a later age than our parents did. Today, we have virtually unlimited access to financial data and analysis via the Internet.
All this should make saving and planning for retirement easy, right? Not so fast. With everything we’ve been through in our working lives — including the dot-com collapse in 2000, the 9/11 attacks in 2001, the Great Recession of 2007-2009 and two long overseas wars — it’s not hard to see why a sort of “analysis paralysis” has set in, impeding prudent financial planning for many.
Recently I walked into a conversation between my husband and brother-in-law on the merits of pre-tax retirement savings. My brother-in-law shared that he doesn’t want to participate in a retirement plan because he doesn’t want to tie up his money until age 59½. Since he is self-employed and in a fairly high tax bracket, I asked why he wouldn’t want to hedge his bets — put some money into after-tax savings that he can access anytime but also get started on a pre-tax retirement plan so he can plan for the future while reaping tax benefits today.
After hearing the benefits of pre-tax savings, he now understands why it can be worthwhile to reduce his federal and state income tax with each dollar he defers into a pre-tax retirement plan. And because he is self-employed, he is saving on self-employment taxes as well.
With that in mind — and with the future of Social Security in question and people living longer nowadays — here are some things Gen Xers should be doing, starting today.
- If you have an employer-sponsored retirement plan and aren’t participating, start doing so — immediately, if possible. Contribute at least enough to get any matching contribution your employer offers. If a Roth 401(k) is available to you (in which you save post-tax money now for potentially tax-free benefits later), strongly consider it.
- If a Roth 401(k) is not available to you, consider saving in a Roth IRA if you qualify (income limits apply).
- Build up a cash reserve of three to six months’ worth of living expenses so you don’t have to tap your retirement savings should something unexpected occur. I’ve seen so many people do the right thing and start contributing to a retirement plan while in their 20s, only to have something go wrong and then cash it out or borrow from it because they didn’t have any liquid savings available.
- Once you have a cash reserve and some pre-tax and/or Roth retirement savings building up, consider additional investing for intermediate-term goals such as buying or remodeling a house or saving for children’s college expenses, or even longer-term goals like early retirement.
The great news is that we Gen Xers have excellent tools available to us as long as we use them properly. Seek help from a reputable financial advisor to make sure you’re on the right track — or to help you get there.
Learn more about Jordan on NerdWallet’s Ask an Advisor