Counterpoint: Why Generation X Shouldn't Panic About Retirement

Generation X
Generation X

One of the biggest fears people have about retiring is that they won't have enough money to last their entire lives. Yet as members of Generation X grow into middle age and start thinking more seriously about their retirement plans, the warnings they're hearing about how far behind they are may make the situation sound more dire than it actually is.

A just-released survey from Fidelity Investments describes the challenges that people in the roughly 35- to 50-year-old age bracket face right now.

The survey found that American workers could see their incomes drop by 28% after they retire, potentially leaving them unable to pay all of their projected living expenses. And a more in-depth study of Gen X households showed a big potential shortfall in income compared to the amounts that those surveyed said they'd need for monthly retirement income.

Ignore Those Alarm Bells for Now

As fellow Motley Fool contributor Chuck Saletta writes in his article on this subject, these numbers hopefully will raise awareness among Gen X workers that they need to plan more actively for their retirement years by increasing the amount they save and choosing investments with higher returns.

But before you decide that you'll have to take more extreme measures like delaying your retirement or taking part-time work as a semi-retiree, I have some good news: The amount of income you'll need as a retiree is probably lower than you think.

Reality Check, Please!

The two big variables that go into your retirement planning are how much money you'll have coming in versus how much you plan to spend.

Typically, workers recognize that they won't need as much as their full current income once they retire, but they'd prefer to take in something close to that amount. For instance, in the Fidelity survey, the typical Gen X household earns about $6,200 per month before taxes, and they guessed that they'd need $4,900 for monthly expenses during retirement -- about 80%.

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That 80% figure is consistent with the projections that many financial advisers suggest as a baseline for doing retirement planning. But it doesn't reflect reality, at least, not when you compare it to actual retiree behavior.

The Bureau of Labor Statistics puts out a Consumer Expenditure Survey every year that monitors what people in various age groups spend their money on. The most recent survey found that when you compare the spending patterns of people in the 35-54 age group with those of retirees, the older group spends well below that 80% figure.

How You'll Spend Less

The biggest line item that drops during retirement is the amount you pay in taxes. The Social Security and Medicare taxes that employees have to pay disappear entirely once you stop working, and much of the income retirees receive is either not taxed at all or only partially taxed, leading to a decline of two-thirds or more on your overall tax bill.

But surprisingly, other categories of expenses also drop dramatically:

  • Transportation is a big one, as retirees don't have to commute to work and can be more flexible with their leisure travel, taking advantage of discounts that workers often don't have time to use.

  • Food, clothing and entertainment expenses all dropped significantly as well.

  • And although rising health-care costs offset some of those savings, in total, the typical 75-year-old spends just over halfwhat the typical worker in the 45-54 age range does.

You Still Have to Worry -- But a Little Less Than You Might Think

None of this means that Gen Xers should simply assume that everything will be fine. Plenty of uncertainties still exist, ranging from whether Social Security will get cut how health care coverage will change.

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Following some of the advice in the Fidelity study, including saving more and looking into alternative investment options such as annuities, can help make sure that you'll be prepared no matter what happens. It'll take work, but with smart moves on both the income and expense side of your budget, you can make ends meet in retirement and still expect to do the things you've always dreamed of doing.

But dire predictions about finances often make workers of all ages lose hope that they have any chance at a secure retirement. If you're one of them, don't let the fear mongers convince you that your retirement is doomed.

Motley Fool contributor Dan Caplinger has a long list of things he'd like to do in retirement. Click here for a free video research report on Social Security, Medicare and your retirement from The Motley Fool.