The retirement landscape for members of Generation X, the first cohort to rely mostly on a 401(k) savings plan to provide a retirement income, is gloomy. 

According to a report from Fidelity Investments, the average account balance for Gen X clients is $178,500, a far cry from the $1.5 million that is believed to be what is needed to retire today. 

Despite that, Spokane-based wealth management advisers say there are strategies for those eager to catch up as they approach their retirement years, and trends in the corporate world that are helping Gen Xers make up for lost time. 

Born between 1965 and 1980, the oldest members of the generation turn 60 next year, and the youngest are in their mid-40s. Gen Xers largely began their careers during a shift in the American workforce in which most of the private sector moved away from providing traditional defined-benefit pension plans in favor of 401(k) plans that placed the onus on employees to participate and invest.

A recent report from Goldman Sachs Asset Management dubbed Gen X the “401(k) experiment generation.” The same report cited 45% of Gen Xers who say they are behind schedule on their retirement savings. 

JM Larson, investment adviser for Spokane-based Richards Merrill Wealth Management, says that the biggest takeaway learned about 401(k)s over the years is the importance of investing early and often. For Gen Xers who might not have started saving until much later and feel ill-prepared for retirement, it’s better to look ahead and take advantage of available opportunities.

“Whether that is time left working, establish a few key goals and ask what you can do to maximize your time between each of those goals and how can you pivot at those different junctions in time, and then have a plan afterward," Larson says. "That transition of building wealth to then living off what you’ve created takes a mental shift.” 

Mike Vickerman Jr., president and CEO of Vickerman Investment Advisors Inc., says Gen Xers in their late 50s have retirement savings of $88,000 on average, a figure that has stayed consistent over the past 10 years. 

 “You’ve got a big gap there," Vickerman says. "What we’re finding is people in their 50s start to talk to us asking, 'what can I do to maximize my 401(k)?' And they are trying to figure out other vehicles that aren’t pretax to try to catch up on this huge gap.” 

However, he’s noticed two groups within Gen X that have found ways to reach their retirement savings goals, even if they were underfunding their 401(k) or other retirement savings plans for a long time. One group built a successful business and sold it, and the other consists of people employed at privately and publicly held companies that offer stock options to their employees at almost every level. One example is Amazon.com Inc., which offers a tremendous amount of stock options to all employees, from warehouse workers to the executive level, he says.

“All of a sudden, they’re starting to make up the difference to get to $1.5 million with the stock options,” Vickerman says. 

Twenty-five years ago, it was the largest employers that offered options. Now, however, advisers are seeing more opportunities for clients who are offered those types of incentives, including from public companies based in the Inland Northwest, like Liberty Lake-based Itron Inc.  

“It’s changing the trajectory of those people who are taking advantage of those and maximizing their value,” Vickerman says. 

JM Larson, financial adviser with Richards Merrill Wealth Management, says taking advantage of employer-match contributions will help accumulate wealth over time. | Karina Elias 

The Revenue Act of 1978 established the code section 401(k) that allows employees to delay compensation from bonuses or stock options and avoid being taxed on those funds until they are retrieved later in life. Historically, companies offered their employees pensions for their years of work to the company and those payments would last from the time they retired until they died. According to the Bureau of Labor Statistics, as of March 2023, 67% of private industry workers have access to a defined contribution plan such as a 401(k) plan. As of March 2022, 15% of private industry workers have a defined-benefit pension plan. 

Vickerman notes that pensions were written when people’s life expectancy was much lower. His grandfather, for example, received a pension from Washington Water Power—now Avista Corp. Yet, because he lived until he was 90 years old, he received more years of pension payments than wages. 

“Very quickly, in the '80s, they realized, if people are living much longer, we’re going to go bankrupt trying to fund these pension benefits,” Vickerman says. “And so everybody started to adopt the 401(k) and wean people off of pensions.”  

History of the trend

This transition began in the 1980s when Gen X began to enter the workforce and launch their careers. The shift impacted this group the most for several factors, says Larson. With pensions, there was comfort in knowing a pension was promised in retirement, but when the responsibility was placed on the employees with the adoption of 401(k)’s, it became a distressing task for many. 

“I can imagine, especially then when there were fewer resources available than there are now, understanding what you can do to maximize a 401(k) is probably pretty daunting,” Larson says. 

Vickerman notes how in 1990 when he first entered the workforce, he needed every dime he earned to live on and avoided creating a 401(k) with his first few employers. 

“And that is a lot of what Gen X has done,” he says. “What we’re finding today, (Gen X) in their 40s, the mass majority is either not doing a 401(k) or is massively underfunding it.” 

Another characteristic that he has noticed is that for the majority of Gen Xers, their net worth is tied to the equity of their home. Before the onset of the pandemic, it was possible to sell a $1 million home in Seattle or San Francisco, move somewhere cheaper, and set aside the remaining funds for retirement, but not anymore. 

"COVID created this weird thing where housing prices went up everywhere," he says, "The ability to cash out part of their equity and downsize to a smaller home or area of the country that has lower housing prices has diminished, in my opinion by 50% to 75%." 

Larson says that for Gen Xers who are approaching retirement, there needs to be a mental shift to hunker down and focus on saving.

He says it's common for an employer to match up to half of employees' first 6% of income contributed to a 401(k) plan. "If that’s the case, take advantage of that match from the employer, or else you’re just leaving money on the table,” he adds. 

Currently, the max that an employee can contribute annually to a 401(k) is $23,000, says Vickerman. But for people in their 50s, there is a “catch-up” provision in the Internal Revenue Code that allows them to contribute an additional $7,500 for a total of $30,500 per year, he says. 

“And then if they can get a company match, it’s $61,000 a year,” he says. “We’re seeing that Gen Xers who didn’t do it in their 40s are trying to kick it hard in their 50s to try to close that gap,” he says. “The ones that get closer to closing that gap usually have some stock options issued by their company that have contributed to their ability to save faster.” 

Generally, companies that have a minimum of 50 employees will offer a 401(k), says Vickerman. 

Louise Joss, director of client success and senior client success manager with Portland-based Independent Retirement, a company that helps businesses set up 401(k) plans, says a trend she has noticed is employers in the small business sector choosing a safe harbor 401(k) plan. Such a plan is exempt from annual nondiscrimination tests that apply to traditional 401(k) plans and require employer contributions to accounts in which employees are fully vested when made. 

“Many want to have a 401(k) plan to stay competitive in their markets and attract and maintain good employees,” Joss says. 

In addition to talent retention, other benefits to employers when they set up a 401(k) plan include tax deductions on the employer contribution and administrative fees, tax credits and incentives, and tax savings for employees. 

While setting up a 401(k) plan can be expensive and complicated, Joss says with the right people, it’s worth it. 

“When you have the right team around you: Financial adviser, a certified public accountant, and a third-party administrator— this can help take the burden of the plan off your shoulders,” she says. “We can help with the plan administration so the owner can focus on what they do best—run their company.”