Gen X Retirement: Are You Financially Prepared for the Future?

Many Gen Xers are approaching retirement, yet many feel financially unprepared. Rising living costs, market fluctuations, and the decline of traditional pensions have made it harder to build a secure nest egg. Without a solid plan, retiring comfortably may be difficult.

Understanding different savings options, income sources, and tax implications is crucial for long-term stability.

Retirement Accounts

A strong financial foundation for retirement involves using savings vehicles that offer tax advantages and long-term growth. Each type of account has unique benefits, making it important to choose those that align with your financial goals.

401(k)

A 401(k) is an employer-sponsored retirement plan that allows employees to contribute pre-tax income, lowering taxable earnings. Many employers match contributions, effectively providing additional savings. In 2024, individuals under 50 can contribute up to $23,000, while those 50 and older can add an extra $7,500. Funds grow tax-deferred, with taxes applied upon withdrawal. Early withdrawals before age 59½ typically incur a 10% penalty plus income taxes.

Some plans offer a Roth 401(k) option, where contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. Evaluating investment options within a 401(k) is important, as fees and asset allocation impact long-term growth.

Traditional IRA

A Traditional IRA provides tax-deferred growth and is not tied to an employer. Contributions may be tax-deductible depending on income and participation in a workplace retirement plan. In 2024, individuals can contribute up to $7,000, with an additional $1,000 for those 50 and older. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73.

Early withdrawals before 59½ generally incur a 10% penalty, though exceptions exist, such as for first-time home purchases or qualified education expenses. Traditional IRAs offer flexibility in investment choices, including stocks, bonds, and mutual funds.

Roth IRA

A Roth IRA differs from a Traditional IRA in that contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement. This can benefit individuals expecting to be in a higher tax bracket later. Contribution limits for 2024 match those of Traditional IRAs—$7,000 annually, with an extra $1,000 for those 50 and older.

Income limits apply, with contributions phasing out for single filers earning $146,000 and disappearing at $161,000. Unlike Traditional IRAs, Roth IRAs have no RMDs, allowing assets to grow tax-free indefinitely. Funds can also be withdrawn without penalty under certain conditions, such as for a first-time home purchase or after five years. High earners can use a backdoor Roth IRA strategy to convert Traditional IRA funds into a Roth.

Social Security

For many Gen Xers, Social Security will supplement retirement income, but relying too heavily on it could lead to financial shortfalls. Monthly benefits are based on lifetime earnings and the age at which benefits are claimed. The Social Security Administration calculates payments using the highest 35 years of earnings, meaning years with little or no income can lower the benefit.

Delaying benefits beyond full retirement age (66 to 67 for Gen X) increases monthly payments by 8% per year until age 70. Claiming as early as 62 results in a permanent reduction of up to 30%.

Up to 85% of Social Security benefits may be subject to federal income tax, depending on combined income. In 2024, single filers with combined income above $25,000 may owe taxes, with the highest threshold at $34,000. For married couples filing jointly, taxation starts at $32,000, with up to 85% taxable if income exceeds $44,000. Some states tax Social Security benefits, while others exempt them.

Spousal and survivor benefits provide additional options. A lower-earning spouse can claim up to 50% of the higher earner’s benefit if they wait until full retirement age. If a higher-earning spouse dies, the survivor may receive the full benefit amount. Divorced individuals may claim benefits based on an ex-spouse’s record if the marriage lasted at least 10 years and they remain unmarried.

Pension Considerations

Fewer Gen X workers have access to traditional pensions compared to previous generations. Defined benefit plans, which provide guaranteed lifetime income based on salary history and years of service, remain common in government, education, and unionized sectors. These pensions calculate benefits using a formula that considers a percentage of the average final salary multiplied by years of service.

Private-sector pensions have largely shifted toward cash balance plans, which combine features of traditional pensions and 401(k)s. Employers contribute a percentage of salary into an account that grows at a guaranteed rate, with the final balance available as a lump sum or annuity. Unlike traditional pensions, cash balance plans are portable, allowing employees to roll them into an IRA or another retirement account if they leave the company.

Pension income is subject to federal and, in many cases, state taxes. Some states, like Illinois and Pennsylvania, exempt pension income, while others, like California and New York, tax it. Some pensions include cost-of-living adjustments (COLAs) to offset inflation, but not all do. Without COLAs, purchasing power can erode over time, making it necessary to supplement income through other means.

Real Estate Holdings

For Gen Xers approaching retirement, real estate can serve as both a wealth-building tool and an income source. Primary residences often represent a significant portion of net worth, but unlocking that value requires planning. Selling a home and downsizing can free up equity while reducing property taxes and maintenance costs.

Homeowners with substantial equity may consider a home equity line of credit (HELOC) or cash-out refinance, though borrowing against a property introduces repayment obligations.

Investment properties can provide rental income, but managing tenants, maintenance, and market fluctuations can be challenging. Rental yields, vacancy rates, and local property appreciation trends should be carefully analyzed. Short-term rentals through platforms like Airbnb and Vrbo offer another option, though local regulations and fluctuating demand can impact profitability. Real estate investment trusts (REITs) provide exposure to property markets without the responsibilities of direct ownership, offering dividends and potential appreciation.

Tax Implications

Managing taxes efficiently in retirement can help extend savings. Different income sources, including withdrawals from retirement accounts, Social Security benefits, and investment earnings, are taxed differently. RMDs from Traditional IRAs and 401(k)s begin at age 73 and are taxed as ordinary income, potentially pushing retirees into a higher tax bracket. Spreading withdrawals across multiple years or converting portions of pre-tax savings into a Roth IRA before RMDs begin can help control taxable income.

Capital gains taxes apply when selling investments or real estate. Long-term capital gains—on assets held for more than a year—are taxed at 0%, 15%, or 20%, depending on income. Short-term gains are taxed as ordinary income. Homeowners who sell a primary residence may qualify for the capital gains exclusion, which allows single filers to exclude up to $250,000 in gains ($500,000 for married couples) if they have lived in the home for at least two of the past five years.

Tax-efficient investing strategies, such as prioritizing tax-advantaged accounts for high-growth assets and using tax-loss harvesting to offset gains, can further reduce tax burdens in retirement.

Estate Distribution

Planning for the transfer of assets ensures wealth is distributed according to personal wishes while minimizing tax consequences and legal complications for heirs. A well-structured estate plan includes a will, which designates beneficiaries and outlines asset distribution, and a trust, which can provide greater control over how and when assets are passed down.

Revocable living trusts allow assets to bypass probate, reducing delays and legal fees while maintaining privacy. Irrevocable trusts remove assets from the taxable estate, potentially lowering estate tax liability.

Beneficiary designations on retirement accounts, life insurance policies, and payable-on-death accounts should be reviewed regularly to ensure they align with current intentions. Unlike assets governed by a will, these accounts transfer directly to named beneficiaries, avoiding probate.

Estate taxes apply at the federal level for estates exceeding $13.61 million in 2024, though most individuals will not be subject to this tax. Some states impose their own estate or inheritance taxes with lower thresholds. Gifting strategies, such as using the annual gift tax exclusion ($18,000 per recipient in 2024) or funding 529 college savings plans for heirs, can help reduce taxable estates while benefiting loved ones during one’s lifetime.