It used to be that workers stayed with one company for 30 years or more, worked at least until age 65 and then retired. They funded their retirement with a generous defined benefit pension plan and Social Security. It is not uncommon now to hear young people talk of retiring early, sometimes as early as age 50.

Gen Xers, the generation born after the baby boomers, will find it more difficult to retire, at any age than the baby boomers who preceded them. Defined benefit plans are basically a thing of the past. A few companies still have defined benefit plans but the trend is to change to defined contribution plans. Young workers today are unlikely to have the benefit of a pension at their retirement. One exception may be government workers who still enjoy this benefit.

While it’s highly probable that Gen Xers will still receive Social Security payments at retirement, it also seems highly likely that those payments will be less than what’s available today. As more and more baby boomers retire, it will be increasingly more difficult to adequately fund the program, leaving Congress little choice but to reduce benefits and/or postpone eligibility.

Current high deficits and any other new big government programs could lead to further declines in the dollar, an increase in interest rates and subsequent increases in taxes.

It seems highly likely therefore that Gen Xers will have to provide for their retirement via their own savings. Neither the government nor their employer will be a significant provider.

An example may help illustrate why the Gen Xers need to start saving early. Let’s suppose 30 year old John wishes to save $1 million between now and age 65 to supplement his Social Security payments and live a modest retirement. According to financial planning studies, in order for his money to last through a thirty-year retirement in all kinds of markets (from age 65 until age 95), he would need to limit withdrawals to about 4% a year. That 4% can then be adjusted for inflation each year. For a nest egg of
$1 million dollars, the first year withdrawal would be $40,000. Assuming 3% inflation, the second year withdrawal would be $41,200, etc.

If we assume a 6% after-tax rate of return, John would have to save approximately $ 700 a month for 35 years to reach his goal! If you then assume inflation will average 3% for each of those 35 years, at age 65 John’s $40,000 will only have a purchasing power equal to about $14,215 in today’s dollars!

To make matters even worse, Gen Xers will likely have significantly longer life expectancies than baby boomers. This, of course, means they’ll need even more money than the boomers. And, if they want to retire at age 50, they’d better hope they inherit a bunch from their boomer parents or really kick their savings up into high gear!