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Gen Xers Should Consider Sequence of Returns Risk
Raising children, saving for college tuition spending, and caring for aging parents are just three of the many financial and emotional challenges facing Generation X workers.
According to Katherine Roy, chief retirement strategist at J.P. Morgan in New York, Generation X is also very concerned about market volatility impacting their ability to retire comfortably. This generation has seen how Baby Boomers entering retirement during market downturns have suffered in terms of their ability to protect wealth and maintain a steady income.
Sequence risk comes from the order of investment returns, Roy explains. When an individual must make withdrawals from investment accounts as markets are down, this effectively locks in the negative return and gives the portfolio no chance to recover. The negative effects of sequence risk can be surprisingly severe, Roy warns. One must only look back 10 years to the Great Recession to see painful examples of near-retirees losing substantial portions of their prospective retirement wealth effectively overnight.
Experts note that Generation X workers can take various actions today to start to address sequence risk and the various other challenges they face.
“Thinking about sequence of returns risk during your savings years, even some time before you retire, is really important,” Roy says. “This is why you start to see target-date fund [TDF] glide paths begin to de-risk a decade or more ahead of the retirement date.”
Roy notes that, generally speaking, a participant’s highest income and greatest savings rate will typically start during their 40’s or 50’s. Balances in retirement plans therefore can begin to accumulate more rapidly, potentially putting a greater emphasis on defensive thinking.
Of course, many in Gen X are held back from saving as much as they would like in retirement plans because of the need to meet more immediate expenses. More cash-strapped Gen Xers may require special support through financial wellness programs that help with budgeting, reducing debt, boosting college savings, etc.
Tina Wilson, head of investment solutions at MassMutal in Enfield, Connecticut, says many in Generation X want help with their investments. Like Millennials, the generation has benefited from the increased use of automatic plan features and automatically diversified investment portfolios. She says Generation X may also benefit from increased access to tools and calculators that assess their retirement readiness and generate an easy-to-understand metric rating their progress. Having such information in hand will make it easier for Gen Xers to know which investment products and solutions are right for them.
Wilson says TDF managers are starting to integrate asset classes like stable value into the automatic investment solutions used by Generation X and Baby Boomers.
“While Millennials can afford an aggressive portfolio, Gen Xers and Baby Boomers are going to be more interested in this type of approach,” Wilson says. “When you’re younger you will see little to no allocation to stable value, but as you progress and get closer to retirement, the stable value begins to be a core component, as it is designed to give you some downside protection.”
Wilson concludes that all generations are craving guidance on how to balance financial needs—but the challenges are particularly acute for Generation X right now.
“As providers, we need to be working on solutions across the different needs,” Wilson says, “because if we don’t help them on the short or near term, then we can’t get them to be focused on retirement.”
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