The Generation That Plans

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On Retirement

The Generation That Plans
Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
July 27, 2007

Reprinted from the July 2007 issue of Schwab Investing Insights®, a monthly publication for Schwab clients.

On the TV sitcom The Brady Bunch, Jan Brady often complained about having to live in her older sister's shadow ("Marcia, Marcia, Marcia!"). The media's unrelenting focus on baby boomers may cause a similar sense of frustration for Gen-Xers, who are often left out of the spotlight.

Simply put, it's a numbers game. Generation X, comprising those born between 1965 and 1976, has only 41 million people. In comparison, there are 76 million boomers (born between 1946 and 1964) and 72 million Gen-Yers (born between 1977 and 1994). Talk about a "sandwich generation"!

Popular perception hasn't been kind, either. Gen-Xers have been labeled as "reactive," "cynical" or "slackers." But while they may have a reputation as kids with iPods, the truth is they're more likely to be professionals with BlackBerries. And they've done a better job of preparing for a financially secure retirement than their elders, the boomers. But even so, there's a lot more they can do.

Doing a better job than their parents
While many boomers have been caught unaware of their retirement needs, a large number of Gen-Xers have been delving into the details (see the table "Who's Slacking?" below). According to a Harris poll, 70% of Gen-Xers don't expect a pension and 65% aren't counting on Social Security.1 Instead, 55% said they'll rely on investments to fund retirement.

Who's Slacking? Gen-Xers Are Proving Better at Retirement Planning Than Boomers
Percentage of workers ages 35–44 who have:	In 1997 (boomers born 1953–1962)	In 2007 (mainly Gen-Xers born 1963–1972)
Calculated retirement needs	31%	40%
Saved more than $50,000	23%	38%

Source: Employee Benefit Research Institute, 1997 and 2007 Retirement Confidence Surveys.

But there's more to do
Although planning better than their boomer parents has paid off for Gen-Xers in the form of higher savings, it's not all smooth sailing ahead. Like many boomers, Gen-Xers have been delaying marriage and kids, which means that college costs will hit at a time when retirement is, hopefully, just around the corner.

So being prepared for all of these financial needs is especially important. If you're a Gen-Xer (or know one), here are some key steps to staying financially fit and on track to retirement:

Make saving at least 15% of pretax salary a priority. If you got a late start (say, no savings prior to age 35–40), you'll want to increase that number to 25% to 30%. While the house payments and the kids' college fund may take up a big chunk of your income, get started with whatever percentage you can afford—every day you procrastinate means a bigger struggle down the road. Wait until you're 46 to begin saving for retirement, and you'll need to save 41% of your pretax salary to catch up!
Remember, the clock is ticking on retirement. You'll want to make sure you have a detailed retirement plan. Decide on an appropriate asset allocation you can live with over the long haul, no matter how the market fluctuates in the short term.
If you're pressed for time, consider an automatic savings plan, in which you contribute money automatically to your retirement plan from every paycheck.
If you're worried about managing your portfolio, consider a target fund that "targets" a retirement date and automatically adjusts your asset allocation as you near retirement.
Track your spending to find ways of cutting back. Do you really need to spend $4 a day on a double mocha latte? Could you live without an SUV, opting instead for a car that costs less and gets better gas mileage to boot? See the table below, "Doughnuts to Dollars," for ideas on how to trim spending. Even the small stuff adds up!

Doughnuts to Dollars
What you can do	Money saved per year	Savings if invested at 8% for 20 years	Savings if invested at 8% for 25 years
Give up: glazed doughnuts ($0.85)² Frequency: two times per week	$88	$4,350	$6,950
Give up: 2 oz. bag of chips ($0.99)³ Frequency: four times per week	$206	$10,180	$16,265
Cut back: Grande coffee ($1.70) vs. Grande Caffe Mocha ($3.50)⁴Frequency: five times per week	$468	$23,130	$36,950

Source: Schwab Center for Financial Research.

Get used to living on a little less now. It will be a lot harder later on if you spend at or beyond your means for years.
Take advantage of your employer's 401(k) or other retirement plan, at least up to any matching contribution. Consider a deductible traditional IRA or Roth IRA, if you're eligible.
When you get a raise, don't raise your standard of living. Earmark as much as you can for retirement savings.
Next time you get a bonus, don't immediately spend it. Try to put most or all of it into your retirement savings.
Resist the temptation to cut back on saving for retirement, regardless of what's going on elsewhere in your life. Convince yourself that your retirement funds are untouchable; don't tap the till for anything but retirement.
Revisit your retirement plan annually. Don't just review your portfolio's investment performance—also monitor your ability and willingness to save.

Important Disclosures

1. Harris poll conducted for the American Institute of Certified Public Accountants, March 2006.
2. Krispy Kreme Doughnuts; price in Seattle for one glazed doughnut, June 2007.
3. Lay's; price at QFC in Seattle for one 2 oz. bag of potato chips, June 2007.
4. Starbucks; price in Seattle for Grande black coffee vs. Grande Caffe Mocha, June 2007.

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Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment or investment strategy. Automatic investment plans do not assure a profit and do not protect against loss in declining markets.

All charts and research have been compiled from publicly available, proprietary and/or licensed data. Past results are not indicative of future performance. Diversification and asset allocation do not eliminate the risk of investment losses.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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