Generation X is likely to be worse off in retirement than the baby boomer generation — making the cohort the first post-war generation to be more ill-prepared for retirement than the previous one, according to a new study from J.P. Morgan Asset Management.
Baby boomers, or the cohort of Americans born between 1946-64, enjoyed a period of economic prosperity early on in their careers that contributed to strong asset growth and high savings rates not experienced to a similar degree by following generations.
As a result, those younger Gen Xers who are 35 to 44 years old today have a median net worth of approximately $47,000, compared with $102,000 for those of a similar age 25 years ago, according to the report.
These weaker starting points are concerning because they could “compound into gaping differences by the time the younger generations reach retirement age,” according to the report, which defines Generation X as the cohort born between 1965-84.
“The research underscores a fundamental difference in the way the balance sheets of baby boomers and Generation X have played out and will play out,” said Benjamin Mandel, executive director of global strategy within J.P. Morgan's multi-asset solutions group. “The implication is at this rate Gen X will have accumulated less in retirement than the previous generation.”
Because the “confluence of macroeconomic factors” that contributed to boomers' wealth doesn't exist today, the implication for Generation X is they can't use their parent's generation as a barometer for how to prepare for retirement, Mr. Mandel said. Indeed, to achieve the same level of retirement wealth as boomers, Gen X will have to boost savings rates significantly.
According to the report, the median Generation X household would have to more than double its savings rate, to 17.5%, in order to follow a similar trajectory to baby boomers' assets. By way of comparison, the average percentage of salary deferred by all eligible participants in a 401(k) plan is 6.7%, according to the Plan Sponsor Council of America.
“[Generation X] didn't have same opportunity as kids born after the war and emerged from their youth in the 1960s when America was the dominant superpower. That may have been a golden era,” said Christopher van Slyke, partner at WorthePoint Financial who specializes in Generation X clients.
Amy Hubble, founder of Radix Financial, said anecdotally she sees Generation X as more ill-prepared when compared to other generations.
That cohort didn't come up in a workforce with some of the beefed-up features in 401(k) plans today, such as automatic enrollment and escalation, or more “geared investment vehicles” such as target date funds that millennials could take advantage of early on in their careers, Ms. Hubble said. Starting these habits early is important from a behavioral standpoint, she added.
Mr. van Slyke, however, doesn't see Generation X as worse off than the previous generation. Baby boomers had to grapple with the shift from defined-benefit to defined-contribution plans, and with it the need to be personally responsible for retirement savings. Generation X came up in a workforce where that transition had already largely taken place, Mr. van Slyke said.
“That's a difficult transition, considering most people don't have the gene to save,” Mr. van Slyke said.
Further, Generation X will inherit the bulk of boomers' wealth, Mr. van Slyke added. “So they may not have [the wealth] now, but they're going to have it,” he said.