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Members of Generation X – those born between 1965 and 1979 – are hitting middle age and are slowly beginning to take over the leadership positions in business and society.
What experiences moulded this generation and will continue to affect their attitude towards life, work and retirement?
GenXers grew up during a time of major social and technological change. The 80s and early 90s were a turbulent and sometimes violent time in South Africa during the struggle for freedom.
This generation experienced changes in family composition with HIV/Aids, urbanisation and divorce altering traditional family relationships and support networks.
As a result, many see this generation as more autonomous and self-reliant than their parents. However, financial family obligations still weigh heavily on many South Africans, especially those who have managed to achieve greater financial success than previous generations.
This generation is also unlike their parents when it comes to retirement savings. For some families, it will be the first time that the elderly will not need to rely on the old-age state pension.
For others, the type of private pension they can look forward to is very different to that of their parents. When GenXers entered the workforce, traditional defined benefit pension funds were making way for newer defined contribution retirement funds.
This places South African GenXers in the unenviable position of being a litmus test for how well these new defined contribution funds can deliver on members’ expectations.
While retirement has been off the radar for most GenXers, it is now becoming visible on the horizon and retirement reality will start to bite during the next decade.
GenXers will need to face the fact that the responsibility and risk of funding for retirement rests squarely on their shoulders.
However, at a time when GenXers are entering their prime income-earning capacity, saving for retirement is often taking a backseat to managing high debt levels, financially supporting ageing parents and unemployed family members, paying for their children’s education and high medical costs.
Financial stress
Instead of being in control of their finances, this generation often spends more than they earn. The 2017 Sanlam Benchmark Survey found that financial stress peaks between ages 41 and 45, impacting on GenXers’ ability to boost savings.
Their biggest source of stress is short-term debt like car payments, credit card debt and personal loans.
The survey also found that less than half of GenXers are able to meet their debt obligations all of the time.
However, the survey also found that financial stress decreases closer to retirement, perhaps indicating that having the children’s education bills behind you buys some financial breathing space.
Redefining retirement
Despite all the negatives, could GenXers be the generation to redefine the concept of retirement and retirement age, rather working to achieve their financial independence?
Financial independence means that they no longer have to rely on an employer to pay their monthly salary, but can rely on their accumulated savings to pay them a monthly income for the rest of their lives.
A retirement date then becomes an outdated concept, giving way to a much more flexible and fluid understanding of phasing out of employment through contract or part-time work (after leaving full-time employment) rather than a sudden and complete break in employment.
As GenXers, many of us have a personal example of what retirement under-preparedness looks like in the form of a dependant parent(s). Behavioural finance tells us that the easier it is to recall an example of something, in this case financially unprepared retirees, the more likely we are to prioritise our own retirement saving.
That said, it is difficult for anyone to ignore pressing financial needs of close family to save now to ensure that we don’t end up in the same position.
This is especially true in SA, where parents traditionally cared for their children and expect reciprocation of this care when they are in their old age.
The problem with this is that lifespans are now extended beyond what previous generations expected or planned for. If a burden of care is accepted, then that burden will probably last longer than it did for our parents. We, in turn, are also expected to live longer than previous generations.
In a society where inter-generational connectedness appears to be weakening, do we believe, as our parents did, that our children (if we have any), will take care of us if necessary?
This means that they have to be in a good enough financial position to be able to assist and have a strong enough relationship with us, or at the very least feel a moral obligation, to want to assist.
Stories already emerged in previous Sanlam Benchmark Survey face-to-face pensioner interviews of some children who do not feel obliged to help, even if great sacrifices were made to give them an education.
If we expect to be responsible to care for our own financial needs after ending full-time employment, a possible recourse for us may be to put a higher priority on saving for our own future.
Given the financial difficulties currently experienced by GenXers, a window of opportunity to make these savings may only open up after our currently relational responsibilities have passed.
GenXers also face moving goal posts. The traditional goal of a nest egg worth 15 times annual income at retirement has already been questioned giving increased life expectancy.
If serious saving starts later on in life, phasing out of employment post the traditional retirement date may be the only way to build up the needed nest egg.
This makes sense given that we expect to live longer than our parents’ generation. Given current circumstance, redefining traditional retirement may be the only option that will result in comfortable financial independence later on in life.
SIX STEPS TO FINANCIAL INDEPENDENCE
Fortunately GenXers have just enough time on their side to plan for their financial independence. However, there is no room for error. Unlike a 20-year-old who can bounce back from a financial disaster, GenXers do not have the luxury of starting over again – it is time to get serious and take the right steps now.
Here are some strategies to get GenXers back on track for financial independence:
1. Beware lifestyle creep and save more
As GenXers hit middle age, chances are that they have a higher earning capacity than ever before and have built up some assets (property etc.). The temptation is to loosen the grip on thrift and have some fun – buy that fancy car you’ve always wanted, the bigger house – you’ve earned it!
Lifestyle expenses tend to increase year after year, at the cost of reducing debt or saving. Budgeting and tracking expenses isn’t fun, but there are no short-cuts around this one.
2. Focus on short-term debt
Financial distress affects productivity, personal and family life. If unpaid credit card debt is keeping you up at night, check if your employer offers an employee financial wellness programme and take advantage of it.
Repeat, live interactions with a financial counsellor can help GenXers tackle their debt.
3. Whittle down mortgage debt
Mortgage payments are often one of the biggest expenses. After sorting out your short-term debt, boosting your monthly repayments (or using your bonus) to a flexible home loan can help you become debt free.
The faster you pay off your home loan, the less interest you’ll incur over time.
4. Estimate how much you need to save for financial independence
Use an online calculator provided by your retirement fund or an independent firm to estimate how much capital you’ll need to replace 75% to 80% of your income in retirement.
Roughly speaking, you should aim to have saved around 4.5 times your current annual salary at age 45. A calculator would help you fine-tune how much you need to aim for. Don’t forget about healthcare costs in retirement.
5. Catch up on your saving for financial independence
Ramp up your savings when you have reduced your debt levels. Most retirement funds will allow you to contribute more monthly, all in a tax efficient and convenient manner.
Resist the temptation to access your retirement fund money when you change jobs. You are unlikely to make up the shortfall in your nest egg later and may never achieve financial independence.
6. Sort out the paperwork
By now GenXers should have a valid will and have made guardianship provisions for any minor children. If not – do it now! Also consider whether your will is still appropriate.
Generation X may be the “neglected middle child”, but there is still enough time for this generation to take the necessary steps to determine their own future.
Natalie van Zyl is a senior lecturer of actuarial science at Stellenbosch University and is the deputy chairperson of the Actuarial Society of South Africa’s (ASSA’s) Social Security Member Forum. She writes in her personal capacity. Danie van Zyl, FASSA FIA CFP, heads up the Guaranteed Investments team at Sanlam Employee Benefits.
