How the sandwich generation is shaking off its malaise and discovering a new lease on its financial life
By Rebekah Barsch
Ms. Barsch is vice president, planning and sales, at Northwestern Mutual. She is responsible for the execution of the company’s comprehensive financial planning approach and sales of its full product suite.While much ado is made about Millennials and Boomers, Gen X is the proverbial middle child in need of some extra attention.
According to findings from Northwestern Mutual’s 2015 Planning & Progress Study, a good portion of this generation of 35-49 year olds is suffering from financial malaise. Among the four generations surveyed, Gen X’s financial habits were the most lackluster.
Not surprisingly, lack of planning and high debt levels have taken a toll on Gen X’s confidence in their financial outlook. Nearly four in ten say they don’t “at all feel financially secure” while more than two thirds (66%) expect to have to work past traditional retirement age due to necessity. Nearly, two in ten (18%) even believe they’ll never retire.
Understanding the root causes
The state of financial affairs for Gen X points to a confluence of factors. Gen X took a hit during the recession, with Pew research estimating a loss of 45% of wealth between 2007 and 2010. Despite being in their peak earning years, this group is getting stretched in multiple directions. Gen X is at the heart of the sandwich generation – a segment of the population simultaneously taking care of children under 18 as well as adult relatives. Given these realities, combined with student loans, rising routine lifestyles expenses, and new pressures created by longevity, it’s not surprising that Gen X’s financial condition is tenuous. New data from the Insured Retirement Institute, shows that nearly one-quarter (23%) of Gen Xers have quit putting money into a 401(k), IRA, or other retirement account.
Bedside manner
The road to financial healing begins with a candid assessment of a client’s financial goals and situation. Our research has shown that strong reticence among Americans to discuss financial matters, whether it is budgets, retirement or long-term care, is directly correlated with poor planning.
Facilitating difficult conversations and making the planning process feel manageable can help build trust, making the time spent with an advisor feel worthwhile. Empathy and perspective may be the key to winning the confidence of Gen X, a group that, according to our research, is most reluctant to engage advisors. It’s reassuring for clients to know that other clients are facing similar challenges and that you have the expertise to address it.
Holistic care
Given the varying dynamics and circumstances of each client scenario, there’s no magic potion or product for curing Gen X’s financial woes. Rather, the most effective regimen is a comprehensive strategy that includes two key objectives of prudent retirement planning:
- Guaranteed* lifetime income to cover essential expenses
- Flexible assets to meet discretionary expenses
In terms of guaranteed lifetime income, products like annuities could be particularly useful to Gen X. Unlike Boomers, this is the first generation to retire largely without pensions. Compounding the shortfalls in retirement savings, 80% of Gen Xers also do not believe that Social Security will take care of their needs. As a result, two thirds of this generation expects to work past the traditional retirement age of 65 out of necessity, which is clearly not the optimal retirement income planning strategy.
Deferred income annuities (DIAs) were introduced to the market in 2011 in direct response to increasing client demand for solutions to address longevity risk, “Using Deferred Income Annuities to Maximize Income in Retirement,” a paper released earlier this year by Michael Finke, Professor and Director of Retirement Planning and Living, Texas Tech University and Wade Pfau, Professor of Retirement Income, American College found that DIAs:
- Help to mitigate uncertainty and reduce the cost of retirement –The cost of retirement includes the actual cost of generating a given income in retirement in the face of unknown variables such as longevity and asset returns. When a retirement plan allocates a portion of assets to a DIA, the average cost of retirement is reduced by softening the financial blow of a long lifetime or poor market returns by guaranteeing a portion of retirement income.
- Allow investors to take on more equity risk – Setting aside assets before retirement to buy a DIA places a portion of the retirement portfolio into a bond-like asset. With a level of income guaranteed, individuals can then invest the rest of their assets more aggressively while maintaining the same risk profile.
Permanent life insurance (PLI) is an example of a solution that’s flexible enough to bridge income for both essential and discretionary expenses. The “utility knife of financial solutions,” PLI embodies the universal premise underlying insurance, i.e., — “the need never goes away, it just changes over time.” For Gen X, PLI creates options. In addition to the primary benefit for survivors, it offers living benefits ranging from helping to fund college tuition to facilitating business expansion or supplementing retirement income. Client education is essential here as Northwestern Mutual data underscores deep gaps in awareness and understanding around the various uses for life insurance as well as preconceived notions regarding costs.
Regular check-ups
A financial plan is a living document that should evolve along with your client’s income/asset levels, financial/lifestyle priorities and economic/market conditions. Identifying issues early and addressing them is essential to financial health and security. Currently, however, our Planning & Progress Study shows that only about a third of Gen X has modified their plan over time even though the same percentage lacks confidence in their plan’s ability to withstand market cycles and fluctuations.
While the symptoms are certainly sobering, the good news is there’s a course of treatment that can help many in this financially challenged generation, and you are needed more than ever to provide effective financial planning and solutions. For advisors willing to be patient with the “patient,” the prognosis for upside is encouraging as Gen X—anticipated to eclipse Boomers in size by 2028 — recognizes the need to improve its financial future.*All guarantees are backed solely by the claims paying ability of the issuer.
