Money and Gen-Xers - Part II: Prioritizing Your Investments across a Variety of Goals

Gen-Xers (generally those born between 1965 and 1982) have entered the prime of their life – a time when investment priorities can pull them in a variety of different directions.

Many of the younger Gen-Xers are still saving for their first home, while older Gen-Xers are putting money away for both their retirement and their children’s higher education costs. As the chart below illustrates, 33% of heads of households ages 40 to 44 say that retirement is their primary reason for saving, while 22% say that saving for a home, their children’s education or other family expenses is their primary priority. Those priorities change somewhat with age. For those ages 45 to 54, only 15% say their primary priority is saving for a home, their children’s education or other family matters, while 38% say that retirement is their chief priority.

If you’re a Gen-Xer, here are four ways to approach your investment priorities:

1. Dealing with your children’s college costs

It may be a natural inclination to try to help your children cover the costs of their higher education and avoid the mountain of debt that many young college graduates face. It’s a burden Gen-Xers know all too well, since about 26% of Gen-Xers are still paying off their own student loans, according to a study by Pew Charitable Trusts.¹

If you’re financially secure and your retirement savings plan is on track, helping your children with their educational costs – or starting an investment account for that purpose – may be a logical course of action. But if you’ve fallen behind on your retirement savings, you may be better served to encourage your children to find another way to cover their costs.

Redirecting your retirement savings plan to fund your children’s education could put your financial future in jeopardy. Your children may have a number of other funding options available, including scholarships, financial aid and student loans. They could also reduce costs by choosing a less expensive school.

Drawing money out of your existing retirement account to help cover their costs may also be ill-advised. Student loans typically come with a relatively low interest rate, well below the long-term average annual return of the stock market. You may be dollars ahead financially to keep your money invested in your retirement account and ask your children to fund their college costs through low interest rate student loans. If you find later that you have the means to contribute, you can still ease their burden by helping them pay off those loans more quickly. (See: Juggling Your Retirement Savings and Your Children’s Education)

However, if you have the means and the desire to save for your children’s education, there are several investment vehicles that offer some tax benefits, including a Coverdell Education Savings Account, a 529 Educational Savings Plan, or a Roth IRA. While the Roth is an “Individual Retirement Account” that is generally used to save for retirement, you can also use savings from a Roth IRA to cover qualified educational expenses. (Learn more about the educational funding requirements and limitations in the following article: Benefits of Roth IRAs Go Well Beyond Retirement)

2. Invest at work

About 40% of Gen-Xers contribute to a 401(k) or other defined contribution plan at work, and another 9% are enrolled in a defined benefit plan, according to a recent Pew Charitable Trusts report.² If your company offers a 401(k) or other defined contribution plan, you should contribute as much as possible to your plan up to the annual IRS limit ($18,000 for the 2018 tax year, additional $6,000 catch up contribution allowed for those over age 50). Contributions to a traditional 401(k) are deducted from your current gross income for tax purposes, thus typically reducing your income taxes in the years you contribute. Any investment gains within the plan would be tax-deferred until you withdraw the money. In addition, many companies offer to match part or all of your contribution, so failing to contribute really could mean you are leaving money on the table.

If your company doesn’t offer a 401(k) or other retirement plan, you may be able to receive a similar tax advantage by contributing some of your wages to either a Simplified Employee Pension (SEP) or a traditional IRA. (See: Don’t Miss the Tax and Savings Benefits of an IRA)

3. Consider a more aggressive approach for long-term objectives

Gen-Xers range in age from mid-30s to early 50s, which means that most are at least 10 to 25 years away from retirement. Generally speaking, the longer your investment time horizon, the more aggressive you may choose to be with your investment portfolio. A portfolio or mutual fund that is heavily weighted in stocks is considered to be more aggressive (and riskier) than one that is made up predominately of bonds and other fixed income investments.

But while the stock market may be volatile and risky in the short term, its performance has historically evened out over the long term as the economy moved through its various cycles.

Even though stocks are considered to be risker than fixed income investments, there is a fundamental reason long-term investors are often encouraged to invest in stocks rather than fixed income investments: the long-term return of stocks has been dramatically higher. For instance, New York University did a study comparing the growth of $100 invested in the stocks of the S&P 500 Index³ from 1928 to 2016 versus $100 invested in U.S. Treasury Bills during the same period. The T-Bill investment would have grown to less than $2,000 ($1,988) while the stock portfolio would have grown to more than $300,000 ($328,646).⁴ You should remember though, past performance is not an indicator of future results.

4. Investing for interim goals

If you’re saving for a home, a cabin, a boat or some other relatively short-term goal, you would typically be better served to opt for a less aggressive investment strategy than you would for a long-term goal, such as retirement, that may be many years away.

Although stocks or a stock mutual fund might be part of your interim investment portfolio, in order to minimize the risk of loss, you may wish to balance the portfolio with some less volatile investments, such as bonds or bond funds. You might also consider an asset allocation fund that invests in a diverse portfolio of stocks, bonds and other investments. Although diversification – with several asset groups feeding into the performance of the portfolio – does not eliminate risk, it may help reduce losses during market fluctuations. (See: Asset Allocation Funds Can Help Tame Volatility)

While the strategies discussed here may be appropriate for many investors, they may not be suitable for all investors. You should consider your overall portfolio, financial situation, investing experience, time horizon and investment objectives.

(Thrivent Mutual Funds offers four asset allocation funds that are automatically diversified and range from moderately conservative to aggressive.)

Now in their middle-age years, Gen-Xers have enjoyed a steady increase in their average income and investment savings. But will it be enough to avoid the financial issues that Baby Boomers are now facing in their retirement?

Are you saving enough to meet your retirement objectives? Your future financial well-being is at stake, and the clock is ticking.