While Millennials and Baby Boomers face the hurdles behind student loan debt and looming retirement, respectively, age 40-to-50-something-year-old Generation Xers struggle through these two obstacles concurrently, and usually, with more impending financial barriers on the horizon.
Raising children, saving for college tuition, and caring for a sick parent are only three of the many financial (and emotional) issues slowing the progress of saving for short- and-long term needs. Add in the anxieties behind 2018’s wave of market volatility, it makes sense why this middle generation is sacrificing more to fund their retirement.
Katherine Roy, chief retirement strategist at J.P. Morgan in New York City, says participants in this middle-age group should heavily consider discussing sequence of returns risk. Primarily a concern for those nearest retirement or already retired, this risk affects the amount of income for retirees—especially during periods of market downturn, withdrawing money from investments can hinder the direction of remaining withdrawals. If negative returns commence at the start of an investor’s retirement, it may heavily influence withdrawals for remaining years.
Since market volatility plays a large role in accessing negative or positive returns, Roy advises Gen Xers to protect their assets against sequence risk, even before retirement. “Thinking about sequence of returns risk during your savings years, even before you retire, is really important,” she says, pointing out that even target-date fund (TDF) glide paths start derisking when participants reach their 40s and 50s.
Moving into this age group, a larger account balance is at risk, so losing a certain percent return, or utilizing the standard aggressive portfolio all younger workers have, can drastically alter the final outcome, Roy adds.
Instead of continuously focusing on savings, Roy recommends participants take a look at their portfolio and question if they should be derisking—considering their risk capacity— either with the help of a target-date fund (TDF) or adviser. “Professional management with a target-date fund [TDF] or working with an adviser can be helpful in terms of actively guiding participants through that derisking process,” she says.
With a TDF, when investment managers see, or predict, a market decline, they can dial back or reduce the risk leading to the drop, says Tina Wilson, head of investment solutions at MassMutal in Enfield, Connecticut. “If you can protect their downside by allowing them to still participate in the upside of the market, that will have a significant difference on how much income they can produce in retirement,” she says.
According to Wilson, for those participants in their 40s, investing holds a heavier weight than savings, when related to impending income, even more so during a market downside. She says providing retirement plan participants with a financial score—a type of wellness calculator indicating financial health—is beneficial to approximating retirement wealth and deciding how to invest.
“Investments, the risks you take and the downside that you’re subjected to, are incredibly important in driving your future outcome,” she says. “You not only need to have a financial score, but you also need to have different product and investment strategies available to help protect assets on the downside.”
Additionally, Wilson mentions the usefulness of stable value funds during market volatility. While Millennials can afford an aggressive portfolio, Gen Xers and Baby Boomers are typically more interested in this type of account, since it provides returns with less risk. “When you’re very young you get little to no allocation to stable value, but as you progress and get closer to retirement, that stable value begins to be a core component, and it is designed to give you some downside protection,” she says.
And aside from concentrating on long-term savings, investments, risk and market volatility, Gen Xers need to fund for their short-term and mid-term needs as well, whether it’s a rainy-day savings fund for an emergency, a 529 plan for a child’s college education, or just everyday expenses.
“We have to help investors really think through all of that, says Wilson. “Give them prescriptive guidance on how to fund each of those things based on their needs, because if we don’t help them on the short term, then we can’t get them to be focused on retirement.”