Retirement Investor

Retirement Planning Strategies By Generation


Baby boomers, Generation X, millennials, and Generation Z are all at very different phases of life that necessitate focusing on different strategies to achieve everyone’s ultimate goal of retiring one day.  

One Key Strategy For All Generations

One of the most impactful strategies that always benefits all generations is minimizing your total cost of investing. There are two components to your total cost of investing. 

First is your portfolio’s weighted average expense ratio. The second is your financial advisor’s management fee (assuming you use an advisor). 

Every mutual fund or exchange-traded fund you hold charges what’s known as an expense ratio. This is not an explicit charge per se that you pay; rather, it is a portion of the return held back by the fund company to pay their expenses. These expense ratios can be as low as 0.02% or as high as 3.00% or more. These fees can end up taking a massive bite out of your return. To figure out your weighted average expense ratio, you will need to look up each holding in your portfolio and the percentage weight. You can then calculate your weighted average.  

The next component is your financial advisor’s management fee (if you have an advisor). Now, let me say that I believe advisors add value to their clients in many ways, but the price you pay for that value can vary greatly. Taking the time to understand how your advisor is compensated, if you don’t already know, will help you to determine this component. Some advisors charge commissions, some charge a percentage of assets under management, and some a flat fee.  

Let’s take a look at an example. 

Assume an individual has a $2,000,000 portfolio, and we take the industry averages to represent the two cost components described above. 

We can look at data published by the Investment Company Institute’s 2020 Factbook for the first component, the portfolio’s weighted average expense ratio. Their data shows the average expense ratio of all stock funds offered for sale in 2019 was 1.24%, and the average for all bond funds was 0.93%. Based on these averages, a 50% stock and 50% bond portfolio would carry a weighted average expense ratio of 1.09%. 

For the next component, the financial advisor’s management fee, we can look at a study done by RIA in a Box in 2018. Their study found the average advisor that charges on a percentage of assets under management basis, which is, unfortunately, a norm in the industry, charges 0.95%.

Let’s contrast this example to someone who uses low-cost index funds to build an investment portfolio and employs a financial advisor who charges a flat fee. As a proxy, I will use my firm as an example. For the first component, we use only nine index funds, each representing an asset class that we believe a retiree should have exposure to. Through those nine funds, we can build maximally diversified portfolios that give our clients exposure to approximately 30,000 securities across all investable 44 countries, all for a weighted average expense ratio of 0.07%, or less. 

For our management fee, we charge all clients a flat fee of $9,000 per year (that includes ongoing retirement planning and investment management), but still, given our example client had a $2,000,000 portfolio, that translates into 0.45% of the portfolio. So, altogether, the total cost of investing for this hypothetical person would be only 0.52%, or $10,400 per year, for a significant savings of over $30,000 per year! This is a huge savings for someone that may only be drawing $80,000 to $120,000 from this portfolio every year, assuming a 4% to 6% withdrawal rate.

Strategies for Millennials and Generation Z

Most millennials and Generation Z members are earlier in their careers and likely earning less than they will be in the future. Members of these generations should try to fund their Roth IRA early in their career while earning and being taxed less. The ability to contribute to a Roth IRA gets phased out at an adjusted gross income of $125,000 if single and $198,000 for couples. 

High growth assets like stocks in a Roth IRA early in life can put people in a great position later in life by giving them a sizable tax-free income source to fund retirement. Combined with qualified retirement vehicles like a 401(k) or IRA that get taxed at personal income rates when withdrawn in retirement, individuals can craft a superior tax-efficient withdrawal strategy later in life, adding tremendous value to their retirement situation.  

Ideally, members of this generation should first seek to max out their employer’s matching provision in their 401(k). The priority should then switch to maxing out their Roth IRA funding (up to $6,000) before shifting back to maxing out the rest of their 401(k).

Millenials and Gen Z members should hold relatively more stock and fewer bonds in their portfolios. These generations often think they should hold some amount of bonds in their portfolio because it provides them with needed diversification. While bonds do add some diversification, they also lower returns and are less imperative when you have a lifetime of human capital to put to work.  

Think of human capital as the present value of a lifetime of wage earnings, which is steady “bond-like” income. The ability to work for steady pay and make steady contributions to an investment portfolio over time more than serves the role bonds would play in the portfolio. It is not until later in life, when one’s human capital value starts to diminish that bonds need to be considered.

Strategies for Generation X

As members of this generation are progressing through their careers and their portfolios become larger, their management of those portfolios becomes more important as they start thinking about retirement. Diversification becomes more important, as does avoiding concentrated bets, as there is less time to recover from any mistakes at this stage. Diversification is an often misunderstood concept. Someone with just a single index fund could be more diversified than someone with 100 individual holdings. Diversification is not about the number of holdings but rather the asset class exposures each holding represents. 

I believe there are nine distinct asset classes a person should be exposed to, to be maximally diversified: U.S. Total Stock Market, U.S. REITS, Developed Markets Europe, Developed Markets Asia-Pacific, Emerging Markets, U.S. Total Bond Market (investment grade), Total International Bond Market (investment grade, U.S. TIPs, and U.S. High Yield Corporate Bonds (non-investment grade). 

Some members of this generation may make enough money to meet the requirements necessary to be deemed an accredited investor, which gives them access to complex investments like hedge funds and other alternative asset investments. The wealth management industry makes a lot of money off these investment products. Just because you have access to these “exclusive” and impressive-sounding investment opportunities doesn’t mean you should seek to invest. Hedge funds and other alternative asset classes are complex, loosely regulated, opaque, and expensive investments that frequently fail to yield a return commensurate with their true risk and are best to be avoided. 

Given that members of Gen X have probably had time to build up savings outside just their pre-tax retirement accounts, they can now consider employing a strategy known as asset location. The idea behind asset location is that it is advantageous to hold certain types of assets in certain types of accounts. You can view all of your assets and accounts as one giant portfolio. You do not have to create a balanced portfolio in every account.  

When viewed in this aggregate way, you can take advantage of the fact that capital growth assets, like stocks, are best held in taxable accounts. Why? Because they will grow fastest, and when they get taxed, it will be at the lower capital gains rates.  

Holding stocks in a Roth account is even better, with no taxable income on the growth. Holding bonds in a Roth account would be a waste of that account type’s advantage. Income-producing assets, like bonds and REITs, are best held in retirement accounts, so their income distribution can grow tax-deferred rather than becoming immediately taxable as they would if held in a taxable account. 

Strategies for Baby Boomers (Retired)

Members of this generation are likely to have a lower marginal tax rate in retirement than when working. This provides an opportunity to consider the economics of a Roth IRA conversion strategy, also known as a “back-door” Roth. Economics are closely tied to being able to craft a superior tax-efficient withdrawal strategy by coordinating account withdrawals that optimize the realization (or not realizing) of specific categories of income in an attempt to minimize your tax situation in any given year.  

Managing taxable income is complicated and uniquely personal, and there aren’t any hard and fast rules to follow. Strategies will vary from person to person and even year to year for the same person. The trick is to build a habit of projecting taxes and looking for tax opportunities before the end of each year to make it work.

Baby boomers should avoid blindly following rules of thumb like the “4% Rule.” Such rules are most often overly-conservative and based on a set of rigid and simplistic assumptions that often lead an individual to sacrifice quality of life while living, only to leave a larger than planned legacy at passing. Following the “4% rule” in all periods but the one starting in 1966 would have led to a lot of money remaining on the table upon passing, beyond what was planned. That is money that could have been used to maximize happiness and contentment while living. As a rule of thumb, the biggest flaw is it presumes that retirees cannot make adjustments, and this is just not true. The level and degree to which a retiree can make adjustments will differ given each retiree’s unique circumstance, but most times, there is at least a little room for adjustments.

Being able to make adjustments opens the door for adopting flexible spending rules. Flexible spending rules are highly customizable and allow retirees to adjust their spending levels depending on how markets perform over their retirement. Flexible spending rules can actually increase the amount of money you can take from portfolios while also lowering the risk of the plan failing. While this modeling is complex, some retirement specialist software systems can accommodate dynamic withdrawal rule modeling. 

Anthony Watson, CFA, CFP

Tony is the Founder and President of Thrive Retirement Specialists, a fee-only Registered Investment Advisor (RIA) offering a single, flat-fee service entitled ThriveRetireTM that goes far beyond what has traditionally been known as retirement planning. Before this, Tony served as the Chief Investment Officer of a firm where he provided advice and investment management services to over 600 individuals representing over $1.5 billion of investments. Before this, Tony served as Vice President at J.P. Morgan Private Bank, where he advised high- and ultra-high net worth individuals on all matters of wealth, including investments, portfolio construction, portfolio management, and retirement planning.

Tony lives in Dearborn, Michigan, with his wife Dawn and daughters Emma and Anna.


BBA in Finance, Walsh College

MBA, University of Michigan, Ross School of Business


Chartered Financial Analyst® (CFA®)


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