Why GenX and GenY may need to keep working when they’re 80

As economic conditions toughen in the wake of the worldwide recession, financial ‘experts’ have issued a stark warning: individuals in their 40s may find themselves working well into their 80s. Alex Jamieson, a financial advisor and founder of AJ Financial Planning, posits that those aged 40-58 will bear the brunt of economic challenges in the coming years. This demographic, straddling Millennials and Gen X, stands to be the most affected by the current rise in interest rates and cost of living.

“In financial planning, there is what we call the 50/20/30 rule, which guides you on how to allocate your income. Traditionally, 50 per cent should be reserved for essential payments like mortgage, rent and other living expenses, 30 per cent is allocated to lifestyle choices and the balance for debt, super and savings,” explained Jamieson. “With the cost of living now so high, those in their 40s won’t have enough left over to put a reasonable amount into super, and their super won’t keep up with the rising cost of living based on when they want to retire.”

Given that much of the retail super sector lost money in 2022, Jamieson warns that retirement may not be on the horizon for those in their 40s. “I am sorry to say this, but unless 40-year-olds start making some drastic changes now, they are going to be working until they are 80.”

According to Jamieson, those in their 40s typically experience the peak of their spending due to a larger mortgage, living expenses, and costs associated with children. However, this period of tight finances calls for urgent action. “The first steps 40-year-olds need to take include a complete change of mindset,” he advised. “Start acting like you are broke and cut your spending on everything. Get yourself a good financial planner and start saving your money. Acquaint yourself with the power of compounding and start looking for ways to make your money work for you.”

To ensure a secure financial future, Jamieson suggests 5 steps:

1. Review your spending – be ruthless. “Prepare a budget to get a handle on your living costs. There will probably be opportunities to identify excess spending that could be reallocated. Be ruthless with cuts. Every dollar you save can be put into superannuation and other compounding facilities.”
   
   
2. Set up an emergency fund. “Establish an emergency buffer fund to cover unexpected costs. Talk to your bank about using the fund to offset your mortgage. The fund needs to be of a reasonable size to cope with illness, job loss, setbacks, and other life challenges.”
   
   
3. Get your estate planning affairs in order. “If you have kids, revisit your will and estate planning affairs. Life has probably changed considerably since you last checked.”
   
   
4. Review and make changes to your super. “Make sure you are in the right superannuation fund and in the right investment option for your retirement strategy. Mistakes in this area can cost you a lot of money.”
   
   
5. Reassess your mortgage. “Speak with the bank and find out what your mortgage balance might be at retirement age, based on the current interest rates. Ideally, you want it paid off well before. Understand what you need to change to ensure this happens.”

While challenging economic conditions are transient, the consequences could be long-lasting. For those in their 40s, prudent financial management in the coming years will dictate whether they can retire at the desired age, or whether they will be working for many more years.

Alex Jamieson, a financial advisor based in Melbourne, Australia, founded AJ Financial Planning. His firm, providing specialist knowledge in financial planning advice and investment advice, serves a national client base.

What do you think? Are Jamieson’s observations regarding retirement and octogenarian workers on point? Also, does his solution represent good advice or him being out of touch with the financial realities of Gen Y and Gen X? Let us know in the comments or on Reddit or on Linkedin.