Chapter 1: What is the main topic discussed in this episode?
How JetX can rescue their retirement and some stock market optimism amidst high valuations. That and more on this Saturday Personal Finance edition of Motley Fool Money. I'm Robert Brokamp, and this week I speak with Kerry Hannon, co-author of a new book that lays out a retirement roadmap for members of Generation X, the oldest of whom turned 60 this year.
But first, let's take a look back at last week in money. One comes from Fidelity's Urien Timmer, who sees today's market similar to that of early 1999. In other words, the later innings of a bull market, but perhaps another year or so of solid gains. He points out that the current bull market is being driven by actual earnings.
The expected growth rate for third quarter earnings started out at 7% year over year, but has jumped to 13%. Yes, valuations for the market weighted U.S. stock market are lofty, but the P.E. for the median stock is not unreasonable.
The higher P for the cap-weighted indexes are, of course, due to the fact that the market is dominated by the MAG-7, which are not cheap and make up almost 40% of the S&P 500. But Timmer believes that investors can find a good hedge against this concentration risk in cheaper international stocks.
For another rosy review, we turn to Ryan Dietrich of the Carson Group, who recently pointed out that the S&P 500 was down more than 15% by April of this year, but then rebounded and will likely end the year with double-digit gains. If that happens, 2025 will join 1982, 2009, and 2020 as the only other years since 1950 when this has happened.
How did the S&P 500 perform in the calendar years after those previous three instances? It posted double-digit gains each time with the median return being 17.3%. For our next item, we turn to a provision that took effect last year and allows unused money in a 529 college savings account to be transferred to a Roth IRA for the beneficiary.
There are a lot of restrictions around this, including that the account has to have been open for at least 15 years.
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Chapter 2: What challenges does Generation X face regarding retirement?
The amount that can be transferred in a single year cannot exceed that year's contribution limit for an IRA. The total amount that can be transferred is $35,000, and there are many other rules, so do your research before trying this. However, if you meet all the requirements, the transfer is free of federal taxes. But what about state taxes?
Well, a recent article from Ian Berger at irahelp.com provided some clarification. Residents of the nine states that don't levy an income tax have nothing to worry about. 30 states have decided to go along with the federal rules. Three states, Colorado, Missouri, and New Jersey, haven't yet said one way or the other.
California is the only state that has said a 529 to Roth transfer will not be tax-free on the state level. It will be subject to income tax and an additional 2.5% levy.
Also of note, some states allow residents to deduct contributions to 529s, but if you live in Indiana, Louisiana, Massachusetts, Michigan, Minnesota, Utah, or Vermont, you'll have to pay back that deduction if the money is transferred to a Roth IRA.
What all this demonstrates is that if you live in a state that levies an income tax, check to see whether it will conform to any new tax laws passed by Uncle Sam, especially in light of all the new tax breaks in the one big beautiful bill passed in July. Now, the numbers of the week, and they are 2.8% to 4.8%.
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Chapter 3: How are stock market valuations affecting retirement planning?
which is what Vanguard expects as the range of annualized returns from the US stock market over the next decade, according to a recent report, and down a half a percent from a few months ago. They expect 3.8% to 4.8% from US bonds, so just about the same amount, if not a little better. The low expectations for US stocks stem from high valuations that just keep getting higher.
Vanguard expects somewhat better returns from small caps, value stocks, and international stocks, but nothing near double digits. A recent report from JP Morgan Asset Management has a somewhat more optimistic take, with projected annualized returns of 6.7% from U.S. stocks over the next 10 to 15 years, and also slightly higher returns from international stocks and around 5% from bonds.
Will these projections end up being accurate? Probably not, at least not exactly. But I do think it makes sense to assume lower future returns when you do any sort of analysis of your financial plan, such as, you know, using a retirement calculator to determine how much you need to save and when you can stop working.
I've said on the show before that I assume a 6% return when I run my numbers, but given the extraordinary returns we've had over the past few years and today's current valuations, I think I'll notch that down a percentage point.
After all, I'm an older member of Gen X, and we all should be taking careful stock of whether we are on track to retire how and when we want, which will be our next topic of conversation when Motley Fool Monday continues.
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Pull out your mixtapes and your John Hughes VHS tapes because it's time to talk about Generation X, that cohort born between 1965 and 1980 that is now or soon will be in the fourth quarter of their careers. So are they prepared for retirement?
Here to tell us is Kerry Hannan, a senior columnist for Yahoo Finance and the co-author of Retirement Bites, a Gen X Guide to Securing Your Financial Future. Kerry, welcome to Motley Fool Money. Hey, it's great to be here, Robert.
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Chapter 4: What options do Gen Xers have for unused 529 college savings?
Let's find out how you take advantage of that runway ahead of you.
I love that. I love to get to the solutions, but I do want to highlight just a few other challenges that they're confronting. So, for example, the classic sandwich generation, right? I just heard from a Motley Fool reader the other day. He's 55 years old, has a couple of preteen kids, but also has a mother with dementia.
So he's finding it difficult to prioritize his retirement savings at this point because he's got both kids and parents to take care of. Social Security, we don't know what's going to happen with that, but the trust fund could be depleted in less than a decade, depending on what happens. And then you also highlight in the book, the levels of debt.
Tell us a little bit about the levels of debt that Gen X has.
Yeah, I find that it is quite concerning. And the point is, I'm so glad you brought up, you know, this cop between kids and caring for aging parents. But there's this thing called student loan debt. And Gen Xers have a lot of it. And they have more than most other generations. Some of it's their own student loan debt. Some is their children's student loan debt. They also have...
If you think back, this was the time when credit cards were just coming on the scene when they started in their working careers. Gen Xers got very adept with using credit cards in order to pay for things. It became a way of learning how to do this. And so I think what happened is over the years, it didn't matter how much income you made. Have another credit card.
So they've run up pretty exorbitant amounts of credit card debt. And this is something that has got to be tackled. But it truly makes it difficult when you have that revolving credit card debt to pay off and you have to decide, am I saving for retirement or am I paying off this high interest credit card? Chances are you're going to go for that credit card.
Yeah. So as you point out, Gen X has the highest levels of student loan debt, credit card debt. Also, I looked at a report from Fidelity, looked at 401k loans. Gen X has the highest percentage of people with a 401k loan. One in four, Gen X has a 401k loan. But let's move on to the solutions. So we've highlighted a lot of challenges, but what do you think people should do?
Yeah, I say you got this. Here's what you need. First of all, one super positive thing, Robert, is that most Gen Xers are in their peak earnings years. So this is a time in life where you do have income coming in. You have the cash flow in order to take control of this. So if you, in fact, are in this situation, you need to just boil it down. And we've had lifestyle creep, right? It happens.
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