Retirement Planning for the Gen Xer and Millennial

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Whenever you read about retirement planning it almost always focuses on the baby boom generation. What about the Gen Xer? What about the Millennial? More obstacles to retirement present themselves to members of the younger generation than the baby boom generation. However, with a little bit of pragmatism and luck in certain cases the Gen Xer and the Millennial can lay the groundwork for a solid retirement future.

Social security?

Who knows what’s going to happen with social security between fickle politicians monkeying with its policies and the demographic strain from the huge amount of baby boomers drawing on the fund:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2037, the payroll taxes collected will be enough to pay only about 76 percent of scheduled benefits.” (Source: Personal Social Security Statement January 21, 2011)

This arrogant little statement from the federal government means the feds can do whatever they want with social security at any given time and that more than likely the benefits will come short of the stated amount. Given the uncertainty of guaranteed retirement and medical benefits such as Medicare from the government for people who paid into it; the Gen Xer and Millennial will need to amass an even greater amount of retirement assets than the baby boomers to ensure coverage in the shortfall.

The amount needed for retirement in a post safety net world borders on the mind boggling. In planning for retirement assuming the not so unlikely scenario of zero social security, you can forget $1 million and plan for $10 million to pay for health insurance and create an income to live comfortably in your golden years.

Paying for health insurance now for a family runs roughly $2,000 per month. Conservatively, you can expect that premium to at least double over the next 30 years to $4,000 per month or $48,000 per year. Assuming you need $3,000 per month for living expenses, another very conservative figure, adds another $36,000 in needed income for a total of $84,000 per year. Divide $84,000 per year by a 1% yearly interest rate and you arrive at $8.4 million. The $10 million figure is thrown in for a bit of extra inflation.

According to a calculator on, a 22 year old needing to amass $1 million by the age of 67 will need to contribute $1,397 per year assuming a 10% compound annual return. Multiply that amount by ten to arrive at $10 million.

Leverage living at home

The lack of good paying jobs for Gen Xers and Millennials compels many of them to move back in with their parents. Many see this as a demographic tragedy. Some think this is due to Gen Xers and Millennials lacking initiative.

Stigmas notwithstanding, living at home can work to your advantage in saving for retirement. Little overhead from not having to support an entire household means a higher discretionary income or money to put in the bank.

Start setting benchmarks with your savings. Always build a cash cushion first. The general rule of thumb is to have enough cash in the bank to live on for six months. After that, start setting aside equal amounts for a replacement car, a place of your own and retirement. When you finally land that job with a decent salary simply increase your savings instead of lifestyle, boosting your chances for a decent retirement.

Health insurance

Without health care insurance health costs can run into the millions of dollars. With the shortage of jobs with health benefits you may have to plug this potential hole yourself. For a single person, high deductible health insurance can run at an affordable $200 per month. Out of pocket expenses can be covered by your savings.

Stocks for retirement

Stocks remain the best path towards retirement with the historical average running at 10% for the market as a whole. The potential for gain exceeds 10% if one invests in excellent businesses with high barriers to entry that sell needed products. Three stocks to consider for your retirement portfolio include:

Western railroad company Union Pacific (NYSE: UNP) sells one needed service: transportation. It costs a great deal to build a railroad infrastructure deterring new competitors into the marketplace. Union Pacific grew its revenue and free cash flow 39% and 171% respectively over the past three years. Its stock price has advanced 99% beating the S&P 500 loss of roughly 5% over the past five years according to Yahoo! Finance.

Beverage giant Coca-Cola (NYSE: KO) not only sells carbonated soda such as the iconic Coke and Sprite, but “healthy drinks” such as bottled water. In fact, non-sparkling beverages grew 10% versus 3% for sparkling in the last quarter. As health awareness increases throughout the world; demand for healthy drinks made by Coca-Cola will drive its future growth. Coca-Cola stock price advanced 18% versus an S&P 500 loss of 5% over the past five years according to Yahoo! Finance.

Retail giant Wal-Mart (NYSE: WMT) rules the shopping center as it profitably sells groceries and dry goods to people looking to conserve money. Even with its huge size, Wal-Mart managed to grow its revenue 3% in its most recent quarter. Wal-Mart still has room to grow as it expands into new markets with its Wal-Mart “Neighborhood Markets” and Wal-Mart Express stores. Over the past five years Wal-Mart returned its shareholders 44% versus a loss of 5% for the S&P 500 according to Yahoo! Finance.

The takeaway

With the dismantling of the social safety nets such as social security and Medicare, Gen Xers and Millennials need to start saving now, as often and as much as they can to build a cushion, save for a car and a house and invest as much as they can in stocks. In all likelihood, for the Gen Xer and Millennial, retirement assets will serve as the only safety net in their elder years.

stockdissector has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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