As individuals enter their mid-50s, the prospect of retirement becomes increasingly tangible. However, for many Gen Xers, this stage of life is fraught with anxiety about their financial readiness for retirement. A recent survey by Prudential Financial underscores this concern, revealing that the median retirement savings among 55-year-olds is less than $50,000. Given this stark reality, it’s no surprise that approximately two-thirds of this demographic worry about outliving their savings.
The Prudential survey highlights a troubling trend: Americans at 55 are far less financially secure than their older counterparts. One major factor contributing to this insecurity is the anticipated depletion of Social Security’s trust funds by 2035, coinciding with the retirement age of this generation. Unlike previous generations, many Gen Xers will face retirement without the full support of Social Security and without the benefit of defined pension plans.
This financial precariousness is further illustrated by the phenomenon Prudential terms the “Rise of the Silver Squatters.” Nearly a quarter (24%) of 55-year-olds expect to need financial support from family members during retirement, a figure that is double that of 65- and 75-year-olds (12%). Additionally, 21% foresee needing housing support, compared to 12% of 65-year-olds and 9% of 75-year-olds.
Despite these daunting statistics, there is still hope for those in their mid-50s to improve their retirement readiness. By taking decisive action and following three key steps, future retirees can enhance their financial security.
1. Get Serious About Saving
Gen Xers have faced numerous financial challenges, which have contributed to their savings shortfalls. Many started investing late, with the average starting age being 32, according to Charles Schwab’s Modern Wealth Survey. This late start has left them with less time to benefit from compound growth. Moreover, their working years have been marred by significant economic disruptions, including the dot-com bubble, the 2008 financial crisis, the COVID-19 pandemic, and post-pandemic inflation. A Natixis Global Survey found that 41% of Gen Xers believe inflation is jeopardizing their retirement plans.
Despite these hurdles, building a retirement nest egg is non-negotiable. With about a decade left until retirement, it’s crucial to prioritize savings. This involves creating a budget that emphasizes savings and automating the process. Online tools like the calculators on Investor.gov can help set realistic savings goals. A common guideline suggests having a retirement fund equal to 10 times your final salary. Achieving this may require significant lifestyle adjustments, such as downsizing to a cheaper vehicle or taking on a side job.
Once a budget is established, set up automatic contributions to a 401(k) or IRA. This ensures that savings are prioritized and invested before any other expenses are addressed.
2. Catch Up with Catch-Up Contributions
The federal government offers a valuable tool for those over 50: catch-up contributions. These allow for additional tax-advantaged savings in 401(k) and IRA retirement plans. In 2024, the 401(k) contribution limit is $23,000, and the IRA limit is $7,000. Individuals aged 50 and above can make extra catch-up contributions of $7,500 to their 401(k) and $1,000 to their IRA. Maximizing these contributions can significantly bolster retirement savings. For instance, investing $30,500 annually in a 401(k) over ten years, with a 10% return, could result in nearly half a million dollars, not including potential employer matching contributions.
While not everyone can afford to max out their contributions, striving to contribute as much as possible will substantially improve financial security.
3. Choose the Right Investments
Selecting the appropriate mix of investments is crucial for balancing risk and return. A general rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio to allocate to equities. For a 55-year-old, this suggests having at least 55% of their portfolio in stocks.
Choosing low-cost, broadly diversified index funds, such as those tracking the S&P 500, can help achieve consistent returns while minimizing fees. High fees can significantly erode investment returns, so it’s essential to select funds that offer broad market exposure at a low cost.
By following these steps, individuals in their mid-50s can address their savings shortfalls and work towards a more secure retirement. With careful planning and disciplined saving, the goal of leaving the workforce can become a reality rather than a distant dream.
