Wikinvest Wire

Gen X, Gen Y, debt, and savings

Tuesday, May 20, 2008

This USA Today story kind of misses the whole point about Gen Xers by starting out with a 30-year old lawyer and his soon-to-be MBA wife who are struggling with college debt.

Generally defined as those individuals now 27 to 43 years old, Gen Xers are far better represented by the millions of 40-year old spendthrifts who are just now realizing that their home isn't going to do all the heavy lifting for their retirement savings.

Of course, the current problem for all generations is the debt that they have all accumulated and Gen Y - from 11 to 25 years old - may be best prepared for the future simply because they've had less time to borrow and spend.

"One of the biggest issues facing the Gen Xers," observes Pam Hess, director of retirement research at Hewitt Associates and a Gen Xer herself, "is lots of competing priorities, juggling lots of different costs and financial priorities. It will continue to be a struggle."

Consumer debt is one of the main reasons. Nine out of 10 consumers in their 30s are in debt, compared with 76% of those in their 20s, according to the Federal Reserve's Survey of Consumer Finances. In a recent Charles Schwab study of more than 2,000 Gen Xers nationwide, 45% of respondents said they had too much debt to think about saving.

Gen Xers also are the first generation to graduate from college with significant student loan debt. About 20% of adults in their 30s are still paying college loans, according to the Federal Reserve study; the median balance exceeds $13,000. Yet, even as Gen Xers continue to grapple with college debt, experts tell them they need to be putting aside money for retirement, as well as for college savings for their children.
While it it true that college debt is much more significant than, say, 20 years ago, the twenty-something that duly saves for retirement is an odd-bird indeed. What little discussion of retirement planning you get while still in or just out of school seems to go in one ear and out the other and understandably so.

Who wants to think about retirement when you've just started to work?

However, if you're not beginning to think about long-term financial planning by your mid-thirties or early-forties at the latest, then you are setting yourself up for a big disappointment later in life, which is basically what most people are going to get.

While an excellent development for the bottom lines of corporations, replacing fixed benefit pensions with fixed contribution 401ks and IRAs is not the way to ensure sound retirements for the many millions of Americans who have become accustomed to spending more than they earn.

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Bruno said...

I know a baby boomer who is in the same boat. Started a family somewhat later in life, has a moderate but still expensive lifestyle, and they can't even think about saving much for retirement with kids to raise. Part of the problem, however, is our expectations of what we can really afford in daily life. Two cars is a norm now, not a luxury. A 2500 ft home with all the goodies. Vacations annually. The truth was, and we didn't realize it at the time, that we couldn't really afford all that stuff. But I don't see much more cutting back being done till it gets really bad. Sure, people are cutting out the really obviously wasteful stuff (boat purchases, starbucks, eating out at sit down restaurants 3-4 times a week) but the big money saving way. Our culture is predicated on looking and living like royalty . And people's social status is all tied up in their homes, their cars, clothes, and nobody wants to reset back to reality.

Luckily I have no kids and have a nice fat retirement account. But if I did I'd be worried. People are going to have to make some tough decisions.

Anonymous said...

What about Gen-E? (Generation Entitlement)

walkerj said...

I don't agree with the advice that you should save while still having long-term debt. Doing so is essentially a carry-trade: a leveraged bet on the differential between the interest rate to be paid and the return on the (speculative) investment asset. Most average Joes can't get their brain around this, so they shouldn't be doing it.
Note that buying a house is a huge, highly-leveraged carry trade, which the whole country is now discovering, to its dismay. But at least you can live in the asset. ;-)
Here's my bonmot: When you've bought a house, you don't own the house; the bank owns the house. You own the risk.

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