Home Retirement Top 7 Investing Mistakes Gen Xers Make Before Retiring

Top 7 Investing Mistakes Gen Xers Make Before Retiring

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Are you eyeing retirement on the horizon? These days, people are facing unique challenges in preparing for their golden years. The personal finance landscape has shifted dramatically, leaving many to grapple with savings gaps and a lack of confidence.

If this sounds like you, then you’re in the right place. We’ve gathered seven common investment mistakes that you must avoid to be retirement-ready and offer easy ways to catch up on retirement planning if you’re falling behind. Nail these dos and don’ts so that you can kick back, relax, and enjoy your second childhood without financial worries.

Why Generation X Retirement is Different

Generation X is the first generation to rely primarily on 401(k) retirement plans instead of traditional pensions — with this development, Gen Xers take on new challenges in securing their financial future. 

A recent survey by Allianz reveals that 58% of Gen Xers don’t have a financial plan, and  55% wish they had saved more for retirement. This lack of retirement confidence is further compounded by the fact that Gen Xers anticipate a significant gap between their retirement savings and the amount they believe they’ll need to retire comfortably. 

Retirement Savings Gap

Northwestern Mutual’s 2024 Planning & Progress Study found that American adults estimate they will need $1.46 million to retire comfortably but most only have around $93,000 saved, leaving a frightening shortfall of nearly $1.37 million to stress over. The retirement savings gap facing Gen X is particularly concerning given their proximity to retirement age. 

The increased reliance on employer-sponsored 401(k) plans in place of old-school pension plans has shifted the burden of retirement planning onto Gen Xers themselves. Two independent surveys found that only 35% to 40% of Gen Xers are getting professional financial advice to develop a comprehensive retirement strategy, significantly less than their Millenial and Boomer counterparts.

This illustrates that people born between the mid-1960s and early 1980s are poorly prepared for retirement and are at risk of financial stress if they can no longer work. This underscores the need for Gen Xers to make retirement planning a priority. 

Economic Barriers to Retirement Security

Many Gen Xers find themselves struggling to balance competing financial priorities, such as paying off student loan debt, managing rising living costs, and saving for their children’s education, leaving limited resources for their own retirement savings. 

Many Gen Xers find themselves sandwiched between competing financial responsibilities from supporting aging parents, to raising children and putting them through college, leaving limited resources for their own retirement as they manage their existing debts and contend with rising living costs. 

Economic downturns such as the dot-com crash, the 2008 financial crisis, and the COVID-19 pandemic have further hindered Gen X’s ability to build wealth and save for retirement. With the decline of defined benefit pension plans and the uncertainty of Social Security, many Gen Xers have found themselves in a perilous battle for securing their financial future.

Despite the critical condition your retirement planning may be in due to these hindrances, being proactive is the key to resuscitating it.  Here are seven major things to avoid to bring your ailing retirement plan back to life.

1. Procrastinating on Retirement Savings

One of the most common retirement mistakes Gen Xers make is delaying contributions to their retirement accounts. Procrastinating on savings can have a profound impact on retirement readiness, as the power of compound interest works best when individuals start saving early and consistently.

For Gen Xers who have delayed retirement savings, all is not lost. The most effective approach is to maximize contributions to tax-advantaged retirement accounts, such as 401(k) plans and IRAs, during peak earning years. If you’re age 50 or above, take advantage of catch-up contributions to retroactively save in your retirement plans for previous years.

Another strategy is delaying Social Security benefits until age 70. By postponing the start of Social Security payments significantly increases your monthly benefits, helping to offset the costs of a potentially longer retirement. Additionally, you can consider staying in the workforce after reaching retirement age to keep saving and growing your retirement portfolio.

If you’re a particularly high earner, you could consider making backdoor Roth IRA contributions to reduce your tax burden. This legal loophole allows you to contribute more than the annual maximum by converting past contributions to other retirement accounts. However, it’s recommended to speak to a financial professional before attempting strategies that involve lessening your tax liability.

2. Not Diversifying Investments

Concentrating funds in one type of investment can amplify losses if that particular asset underperforms. Gen Xers should avoid putting all their eggs in one basket, as it exposes their retirement portfolio to significant risk. Effective diversification tactics include spreading investments across various asset classes like stocks, bonds, and real estate to reduce the impact of any single investment’s poor performance.

By investing in different sectors and industries, you capitalize on more opportunities, offset your potential losses, and stabilize your overall portfolio. Diversification is crucial for preserving capital and safeguarding wealth during economic downturns or industry-specific crises.

A well-balanced portfolio is less susceptible to market fluctuations, providing you with a more stable financial foundation for retirement. Consulting with a professional financial advisor can help create a tailored investment plan that suits unique goals and risk tolerance, ensuring long-term financial success in retirement.

3. Ignoring Employer Matches

Is there such a thing as free money? Many would argue that employer contribution match programs on 401(k) retirement plans are just that. By taking advantage of these, you’re essentially multiplying your retirement savings at no extra cost.

Employer matching is a valuable free benefit that can significantly boost retirement savings, yet a surprising number of employees fail to contribute enough to receive the maximum match. If you’re not maximizing your annual contribution, you may be missing out on free money.

To make the most of employer matching contributions, become familiar with your company’s 401(k) plan. This includes understanding the matching formula, which typically involves the employer matching a certain percentage of the employee’s contributions up to a specified limit.

For example, if an employer offers a 50% match on contributions up to 6% of the employee’s salary, the employee should aim to contribute at least 6% to receive the full match. Failing to do so means missing out on a portion of the potential match — it’s like refusing a 3% bonus on your paycheck. Who would say no to that?

Another thing to be aware of is vesting schedules associated with employer contributions. Vesting refers to the employee’s ownership of the employer’s matching funds. Some companies require employees to work for a certain period before they fully own the matched contributions.

Ignoring the employer match is a costly mistake that can have long-term consequences for financial security. By making the most of your employer’s retirement benefits, you can significantly boost your savings and be better prepared for your sunset years. 

4. Chasing High Returns

Pursuing investments with the potential for outsized returns can be tempting, but it’s crucial to prioritize long-term growth over quick gains. Chasing high returns often involves taking on excessive risk, which can backfire and jeopardize retirement savings. 

High-risk investments, such as speculative stocks or cryptocurrencies, may promise substantial returns but can also lead to significant losses. For Gen Xers nearing retirement age, the consequences of a major financial setback can be devastating.

Remember that slow and steady growth through a well-balanced portfolio is more likely to lead to a secure retirement than chasing high returns. It’s essential to carefully evaluate the risks associated with any investment and ensure they align with your risk tolerance and retirement goals.

Avoid making impulsive investment decisions based on market hype or fear of missing out, as these can derail your retirement savings efforts. Instead of chasing unrealistic returns, focus on building a diversified retirement portfolio that balances risk and reward and prioritizes long-term growth strategies over short-term gains. 

This means focusing on investments that have a proven track record of delivering consistent returns over time, such as index funds or blue-chip stocks. By embracing a long-term perspective, you’ll benefit from the power of compounding and ride out short-term market fluctuations. 

5. Neglecting Debt Management

High-interest debt like credit card balances can quickly spiral out of control and eat into potential retirement savings. The burden of high-interest debt can be particularly detrimental to Gen Xers who already grapple with a retirement savings gap and have limited time to catch up on their retirement planning.

The longer you carry high-interest debt balances, the more interest they accrue, making them increasingly difficult to pay off and redirect funds towards retirement. Neglecting debt management can lead to a vicious cycle of mounting interest charges and diminished financial resources for the future. 

To improve retirement readiness, prioritize reducing high-interest debt. One effective approach is to focus on paying off the highest-interest debts first while making minimum payments on others. Consolidating debt through balance transfer credit cards or personal loans with lower interest rates could also help streamline repayment efforts.

Additionally, explore debt management programs or work with financial advisors to develop personalized strategies for eliminating debt and redirecting funds toward retirement savings.

6. Overlooking Tax Implications

Gen Xers must consider the tax implications of their retirement savings strategies to maximize their nest egg and minimize their tax burden. Failing to account for taxes can significantly erode retirement income, jeopardize financial security, and have legal risks — being in jail will severely limit your ability to enjoy life as a senior citizen.

It’s crucial to prioritize tax efficiency in your investment and withdrawal strategies. This means understanding how different types of retirement accounts are taxed and how withdrawals from these accounts can impact your overall tax liability. Carefully structure your retirement portfolio and time withdrawals strategically to minimize your tax burden and keep more of your hard-earned savings.

One effective way to reduce tax liability in retirement is by leveraging tax-advantaged accounts, such as Roth IRAs and Roth 401(k)s. Unlike traditional retirement accounts, which offer tax deductions on contributions but require taxes to be paid on withdrawals, Roth accounts allow for tax-free growth and withdrawals in retirement. Now who wouldn’t want a tax-free source of income?

7. Forgetting About Inflation

Inflation erodes everyone’s purchasing power, but your retirement savings will be impacted the most over time. Even a moderate inflation rate of 2% to 3% can significantly reduce the value of savings and leave retirees struggling to maintain their standard of living. Failing to factor in inflation when planning for retirement can lead to a substantial retirement savings gap and a diminished quality of life.

For example, let’s assume an annual inflation rate of 3% (which is on the pessimistic end of what it might actually be). At that rate, a $100,000 retirement portfolio today may only have the buying power of $55,367 in 20 years. Accounting for inflation and regularly adjusting savings strategies to keep pace with rising costs makes a huge difference in your retirement readiness.

Mitigate the impact of inflation on your retirement savings by adjusting your financial targets for rising costs. Try investing in assets that’ll potentially outpace inflation, such as stocks and real estate. Regularly review your retirement income sources, such as Social Security benefits and 401(k) withdrawals, to ensure they keep up with the rising cost of living or are supplemented by other income streams. 

Gen X Retirement Strategies for Catching Up 

There are many actions you can take now if you’re behind on saving for retirement. For one, you can take advantage of catch-up contributions to your retirement savings account. If you’re over 50 years old, you can contribute an additional $7,500 to your 401(k) in 2023 and 2024. Automating savings by setting up regular contributions can help make saving a habit and ensure consistent progress toward retirement goals. 

It’s essential for Gen Xers to make informed decisions and adjust their investment portfolio to align with their risk tolerance and timeline. Financial advisors help navigate the complexities of retirement planning, assess your unique financial situation, and provide tailored recommendations on how to improve your retirement readiness.

Retirement age is looming

With retirement around the corner, proactive financial planning is crucial for ensuring Gen Xers’ future. With complexities like inflation and easily overlooked employer matching schemes on retirement plans, Gen Xers are pioneers of modern retirement preparedness. 

By understanding and avoiding common investment mistakes like putting all your eggs in one basket and chasing high returns, Gen Xers are a step ahead in improving their retirement readiness. Gen Xers must take control of their retirement planning by strategically addressing debt and considering tax implications. 

To wrap it up, these strategies can be combined with professional guidance to help keep Generation X from falling behind. To tackle your unique financial hurdles, having a financial advisor on your side can help you find solutions tailored to your needs before it’s too late.

FAQs

What is the most significant mistake people make when planning for retirement?
Making early withdrawals from retirement accounts can be a huge mistake. This can be tempting if you need funds for short-term goals, but such withdrawals before age 59½ typically incur tax penalties and increase your taxable income for that year.

What financial challenges are most prevalent among Generation X?
Contending with Inflation can be a huge challenge for Generation X. Inflation rates are hard to anticipate over the long term, and higher-than-normal inflation in recent years has the potential to set back many people’s retirement plans. Despite this being a major hurdle, a comprehensive investment plan can weather adverse economic conditions.

What are critical errors to avoid in retirement planning?
Common mistakes in retirement planning include underestimating retirement expenses due to rising costs, ignoring employer-sponsored retirement plans, not diversifying investments, not starting to save early, poor debt management, chasing risky investments that promise unrealistically high returns, not accounting for tax implications, withdrawing retirement savings prematurely, overlooking healthcare costs, and neglecting long-term care planning.

How much money do members of Generation X think they need to retire comfortably?
American adults estimate that they will need approximately $1.46 million to ensure a comfortable retirement, according to Northwestern Mutual’s 2024 Planning and Progress study.

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