Google. Green technology. Grunge. Generation X has long been celebrated for taking plenty of risks in business and the arts. But when it comes to investing, the so-called slacker generation has become downright timid and in big danger of falling further behind on its retirement savings.
Financial advisers generally recommend that Gen Xers those 50 million or so Americans now in their 30s and early 40s have at least 70% of their retirement portfolios in stocks. But according to data from several investment and research firms, many Gen Xers are playing it far safer than their parents, and are growing increasingly conservative over time. On average, individuals aged 30 through 44 had just 48% of their 401(k)s in equities at the end of 2009, down from 55% in 2007, according to an analysis by the nonprofit Employee Benefit Research Institute for SmartMoney.com. By comparison, boomers had about 41% in stocks, down from more than 48% in 2007, EBRI reported.
Separately, Fidelity Investments found that about 4 million of the Gen Xers in its 401(k) plans now have about 43% of their assets in stocks and equity mutual funds on average, down 10 percentage points from the first quarter of 2008. And a December survey by consulting firm Aon Hewitt of 2.9 million retirement plan participants found nearly 20% of Gen Xers don't have any equities in their 401(k)s, while another 19% have less than half in stocks. "They're much more risk-averse than they ought to be for their age," says John T. Gugle, a financial adviser with Alpha Financial Advisors in Charlotte, N.C., who says about half of his 100 clients are Gen Xers.
What's got the post-Boomer generation so jittery? Since entering the workforce in the late 1980s, members of Gen X have experienced several intense financial booms and busts, leaving them more wary of the markets than their parents, who lived through the 27-year bull market from 1982 to 1999. The tech bubble burst, home prices dropped, oil prices spiked, and the markets crashed again, says Jim Heitman, a financial adviser with Compass Financial Planning in Alta Loma, Calif. "They don't have a lot of faith that the economy will grow."
Other retirement pros point out that members of Generation X aren't so much frightened by the markets as they are lackadaisical about their 401(k) investments. For example, many individuals who were automatically enrolled in the most conservative option in their 401(k) plans -- a stable value fund or balanced fund -- never changed to a more appropriate asset allocation, says Sue Walton, senior investment consultant at Towers Watson Investment Services. "It's usually set it and forget it," she says. "I think north of 90% don't go back and rebalance."
As a result, Generation X is slipping further behind on saving for retirement at a time when corporate pension plans are disappearing, health care costs are rising and the future of Social Security is in doubt. In fact, some 56% of Gen X households are at risk of not having enough in savings to maintain their current standard of living in retirement, according to a February report by EBRI. A separate study conducted late last year by EBRI found the average Gen X couple with a deficit will need to save an additional $170,000 before they reach 65 to cover basic expenses and uninsured health care costs, compared to $145,400 for early boomer couples (56-62) and $160,000 for late boomers (46-55). "It doesn't look so bleak now," says Pam Hess, director of retirement research at Aon Hewitt, but the situation will be especially difficult for Gen X because "this generation is going to have to shoulder the bulk of their retirement needs.
To reverse course, advisers say Gen Xers need to sock away more 401(k) savings most recommend at least 9% of each paycheck, compared to the roughly 4% average this age group deferred in 2009, according to Vanguard. Equally important, they need to increase their stock holdings, says Stuart Ritter, a T. Rowe Price financial adviser. In fact, for investors in this age group, many target-date mutual funds, which are designed to decrease their exposure to stocks and increase their bond holdings as people get closer to retirement, have 90% or more in equities. On average, funds with a target date of 2045 currently have 89% in equities, while funds with a target date of 2040 have 87% in stocks, according to Morningstar. "The biggest threat to Gen Xers to being able to buy the things they will want in retirement is inflation," says Ritter. "And historically the asset class that best keeps up with inflation is equities."