Retirement planning is vital and necessary for almost every working individual. After retirement, individuals’ income from work stops; however, they still have various expenses, including housing, grocery, medical, and other ordinary expenses in life. In this sense, people need to prepare in advance to fulfill their future financial needs. Retirement savings provide a source of financial security in retirement to help maintain peoples’ pre-retirement lifestyle and well-being. This paper will focus on Generation X and investigate whether this cohort is prepared for retirement compared to Baby Boomers and Millennials. The demarcations of time range defining the generations are closely formulated by the literature: Baby Boomers were born between 1946 and 1964, Generation X were born between 1965 and 1980, Millennials were born between 1981 and 1996 (Cennamo and Gardner 2008
; Twenge 2010
; Dimock 2019
). The reason to select Generation X is that workers in this cohort were found to be the least prepared for retirement according to a media report by Hill
). The Hill
) report mentioned that Generation X had higher levels of mortgage and personal debt obligations than other generational cohorts. Moreover, the Generation X cohort were the next generational cohort approaching retirement. In the 2019 Survey of Consumer Finances (SCF) dataset, which is maintained by the Federal Reserve, and is used in this study, the Generation X respondents were between 40–54 years old. In this sense, the results from this study should inform policy and be useful for explaining the retirement adequacy and preparedness of Generation X relative to the other generations.
This study examines the retirement preparedness of different generations and quantifies the generation effects. The model regresses the generational cohort indicators on retirement preparedness while controlling demographics, socioeconomic factors, and psychological measures. This study identifies the key factors affecting retirement preparedness. The originality of this research is that it constructs unique measurements of retirement adequacy for different respondents, which means that each household will have a unique retirement baseline based on their current age, current income, expected retirement age, and remaining work-life expectancy (RWLE)1
Also, this research considers the purchasing power of money, which indicates that at different timelines, different individuals should have different baselines for retirement to maintain their previous consumption levels. For example, a 30-year-old individual with $50,000 in retirement savings is on the right track to retirement, but $50,000 is far less than enough for a 60-year-old consumer. It is more reasonable to construct unique baselines based on personal situations but not use the same standard for all consumers, which is often applied in the previous literature. Other than that, this study assumes different portfolio returns based on various risk-tolerance levels of different groups. For example, younger generations might want to take more risk in investment, so they will prefer to invest more of their savings into equity rather than fixed-income products. This strategy will adjust risk-tolerance levels to make the results more reliable.
The research will be an update of previous studies on the retirement saving behaviors of Generation X. Most of the earlier literature states that the retirement saving behavior of Generation X is unfavorable, and this generation is often less prepared for retirement. The result of the study is consistent with this statement but also has some disparities. This paper indicates that Generation X is better prepared for retirement than Millennials in safer asset allocations, but there is no significant difference between Generation X and Millennials. Furthermore, the result of the model shows that income and risk tolerance are positively related to retirement preparedness. Also, educational attainment will make a difference in affecting retirement preparedness.
This article provides a review of previous literature about retirement preparedness, and then introduces the theoretical framework of the model used in the research. Data, variable construction, hypotheses, and empirical models are discussed in the method section. Then, the results are presented and are followed by discussions in the last part of this article.
2. Literature Review
Findings from previous studies have implied that the demand for retirement planning will increase in the marketplace. One significant reason for the growing need for planning is that the defined benefit pension plans are being gradually replaced by defined contribution plans. Poterba
) finds that people’s access to, and enrollments in, pension plans have steadily decreased over time. Pension plans or defined benefits plans are retirement vehicles that provide a guaranteed actuarially determined distribution to retirees. The distribution is computed using a formula based on the employees’ number of years of service and the average of their highest 3–5 years of salaries, and the calculations may vary depending on the plan provider (Poterba et al. 2007
). However, with pension plans being rapidly replaced by defined contribution-type retirement plans, the responsibility to save and generate savings for retirement has shifted to the employees (Butrica et al. 2009
). In defined contribution plans, such as the 401K plans that are employer-sponsored retirement plans for American workers (Pence 2001
), the employees must save and manage their investment portfolios within their 401K plan (Ippolito 1995
). Therefore, to adequately prepare for their retirement, working adults should know how much they need for retirement and how much they need to save periodically, in order to meet their post-retirement consumption needs. Since the defined contribution plan is now more prevalent, working adults are responsible for acquiring investment knowledge, accepting the underlying investment risks, and generating adequate savings for their retirements.
However, the extant literature indicates that a substantial number of households are not adequately prepared for their retirement. According to the report of the Employee Benefit Research Institute
), which is a nonpartisan, nonprofit research institute contributing to research on employee benefit programs and public policy, 36% of workers aged 25 and over did not have any savings for retirement. Also, according to the research of Munnell et al.
), almost half of all American working households expect to have inadequate retirement savings. This fraction rose from 31% in 1983 to 40% in 1998 and 50% in 2016. Similarly, in the retirement preparedness survey conducted by Prudential
), two in five respondents indicated that they did not know how much they would need monthly after retirement. The rapidly increasing proportion of under-prepared retirees could portend a sharp drop in retirees’ purchasing power combined with a significant decrease in their financial well-being.
Cohort differences resulting from family and social backgrounds could impact financial well-being and retirement preparedness. College students’ self-esteem was significantly improved between 1968 and 1994 (Twenge and Campbell 2001
), which is within the time range of Generation X and Millennials. It is possible that consumers with higher self-esteem will be better prepared for retirement. The evidence from past literature indicates that personality traits are affected by generational effects. Of the Big Five personality factors, Extraversion, Agreeableness, and Conscientiousness are increasing with age, but Neuroticism tends to decrease (Smits et al. 2011
). High expectations, materialism, and self-satisfaction also increase over generations (Twenge and Campbell 2010
). These characteristics due to cohort effects could potentially influence consumers’ financial well-being and retirement preparedness.
Compared with Baby Boomers, Generation Xers were less prepared for retirement based on most of the past literature. The study by the institution of Retirement Living
) found that only 35% of Gen Xers thought they would have enough savings for retirement compared to 75% of Baby Boomers. Although Gen Xers are younger and are expected to have more favorable views about investments, the Prudential
) study found that Generation X had less investment in retirement capitals than Baby Boomers. A study by Fidelity
) including Millennials found that Generation X was worse prepared for retirement than Baby Boomers but was better prepared than Millennials. Jackson and Hohman
) also found that the Baby Boomers were better prepared for retirement than Generation Xers and Millennials.
There is a concern that the lack of retirement preparedness among the younger generational cohorts may be detrimental to their well-being in retirement. This article uses a new approach to compute retirement adequacy and updates the findings from previous studies, using the most recent 2019 Survey of Consumer Finances (SCF) dataset. Additionally, the research also quantifies and controls for the cohort effects.
3. Theoretical Framework
Life-cycle theory (Ando and Modigliani 1963
) and the theory of planned behavior (Ajzen 1985
) are used to construct a framework for explaining the retirement preparedness of different generations. The life-cycle theory suggests that individuals are planning their consumption and savings and would even out their consumption over their lifetime (Ajzen 1985
). The key assumption of this theory is that individuals tend to keep the same consumption level to maintain a stable lifestyle. This assumption provides theoretical background in constructing retirement preparedness in this paper, which assumes that individuals will keep the same consumption level before and after retirement, so that they would keep the same replacement ratio over their lifetime. This theory explains the behavior that individuals tend to save some part of their income while working and then spend the savings after retirement to keep their consumption level at the same over life.
The theory of planned behavior states that an individual’s intention is shaped by three main components: attitudes (how a person thinks about a particular behavior), subjective norms (how most people think about a particular behavior), and perceived behavioral control (the person’s perception about how difficult it is to perform the behavior) (Ajzen 1991
). Based on this theory, generational differences in retirement savings should exist because different generations have various attitudes, subjective norms, and perceived behavioral control. The behavioral intention in saving for retirement is hypothesized to be influenced by attitudes toward retirement savings, subjective norms, and perceived behavioral control, and the behavioral intention could explain the actual retirement savings behavior.
6. Discussions and Conclusions
The significant findings of this study add to the literature on differences in retirement preparedness by generational cohorts. Applying the empirical model based on the life-cycle theory and the theory of planned behavior, this research confirms the results from previous studies that cohort effects were significantly associated with differences in retirement preparedness (Jackson and Hohman 2019
). In particular, after controlling for various socioeconomic, demographic, and behavioral factors, our results suggest that Generation X maybe better prepared for retirement than the Millennials (Jackson and Hohman 2019
) in general asset-allocation situations. Additionally, income, risk tolerance, and college education attainment are positively associated with retirement preparedness. Our findings add to the literature on retirement planning and contribute to the broader discussion on the generational differences in retirement preparedness, as was discussed in the Hill
This research utilized a new mathematical approach for computing retirement adequacy. Instead of introducing the same standard of retirement preparedness for all the households as done in past literature, the unique baseline of different households works well with the dataset, and most of the results are in line with the expectation. It is more reasonable to compare individuals’ current retirement assets to their own standard based on their current age, income, expected retirement age, remaining work-life expectancy (RWLE), remaining life expectancy (RLE), and asset allocation strategies.
While most of the past literature has measured consumers’ retirement adequacy using the same portfolio return rate (Kim et al. 2014
), this research introduces the asset allocation strategy when examining individuals’ retirement preparedness, as consumers might have varying investment decisions and priorities in different stages of their life cycles. This strategy adjusts for risk-tolerance levels of different consumers as an additional control for behavioral financial differences in the model. Our study shows that Generation X is better prepared for retirement than Millennials in widely used 60/40 and 70/30 strategies. However, when consumers are assumed to take risks by investing more in equity, there is no difference in retirement preparedness across cohorts. When consumers anticipate earning a high rate of return for their retirement savings, their baseline of retirement preparedness is lower because the savings are assumed to grow faster. In this sense, consumers might believe they have already saved enough because of the high return rate, so the differences in retirement preparedness among different cohorts might not be significant. However, consumers should understand that more investment risks will come with high expected returns. Financial planners should recommend that clients set up enough emergency funds when choosing high-risk portfolios to offset the risks in investments. On the other hand, over-allocating one’s portfolio into lower-risk assets generally comprises one’s emergency fund reserves, which comes with high opportunity costs because clients cannot invest these funds in any other retirement accounts with higher return rates. So, financial planners need to comprehensively evaluate clients’ situations when they invest in high-return portfolios, such as clients’ monthly living expenses, income stability, and health situations.
The findings from the results of this study infer that consumers might understand the importance of retirement savings as they become older, and retirement preparations and savings likely gain more priority and salience for people as they progress with age. Consumers may not worry about retirement savings when they are younger, but by the time they realize the importance of saving for retirement, they are likely to find themselves constrained by their investment time horizon, as well as by their risk capacity and tolerance, to achieve their retirement goals. Therefore, the findings from this study confirm that people should be encouraged to begin the process of long-term savings earlier in their lives (Bongini and Cucinelli 2019
). Starting early on saving for one’s retirement, and saving on a regular basis, provides the best opportunity for individuals to accumulate their retirement wealth over time (Farhi and Panageas 2007
). Besides, beginning the investment process early can help individuals mitigate their risk of inadequate savings as people approach retirement. When compared with people who either do not save for their retirement or begin the process of saving very late in their working lives, individuals who begin saving early may feel less pressure associated with needing to add riskier asset classes to their portfolios later on in their lives, which may or may not be compatible with their risk tolerance, as they approach retirement. Additionally, our findings indicate that increasing human capital, including educational attainment and financial literacy, could help consumers prepare earlier and better for retirement.
Future studies need to apply the methodology for calculating retirement preparedness from this study for estimating retirement preparedness using other datasets. Moreover, this study was restricted to only the U.S. generational cohorts, but this research can be broadened, and similar research is needed for examining the retirement preparedness of individuals in other parts of the world, especially in Europe and Asia, where a large segment of the population is either retiring or is rapidly approaching retirement. This study specifically focused on generational cohort-related differences, but future studies need to examine whether other behavioral factors such as self-regulation, personality traits, or perceived financial capability also play mediating roles in the association between generational cohort-related differences and retirement preparedness of households.
As the demand for retirement-planning services increases, the results of this study have implications for financial planning professionals. This research could help promote the understanding of retirement saving behavior among different cohorts. Financial planners may provide varied advice based on the characteristics of cohorts when working with clients. For example, financial planners need to pay more attention to clients’ retirement saving behaviors when working with Millennials, since the Millennials in this study were associated with being less prepared for retirement than Generation X. Advisors might always need to evaluate clients’ current positions for retirement and encourage clients to start saving early and regularly. The findings also suggest that along with income, health conditions, and risk tolerance, educating clients on their financial situations should also be considered when making financial planning recommendations.