While retirement might seem like a distant concern for Gen Z, the earlier they start saving, the better off they'll be in the long run. Though it may feel like there's plenty of time ahead, stashing away even a small amount now can make a significant difference in their financial security later on in life. In this article, we'll explore some effective strategies for Gen Z to start saving for retirement and secure their financial future.
Who is Gen Z?
Born between 1997 and 2012 (ages 12 to 27), Gen Z represents the generation following the Millennials. With the youngest members of this cohort not yet in their teens, it’s no surprise many are still reliant on their parents for financial support.
Gen Zers are characterized by their tech-savvy nature and early adoption of investment strategies including digital banking. Often referred to as "zoomers," they display a heightened concern for job security and financial stability.
How is Gen Z saving for retirement?
A recent survey conducted by Transamerica Center for Retirement Studies found the average age Gen Zers start saving for retirement is 19. Two-thirds of survey respondents said they contribute about 20% of their annual pay through employer-sponsored 401(k)s or similar retirement plans. Overall Generation Z retirement planning is robust: on average, they have already saved $33,000, but on the flip side, their emergency savings are relatively low, with a median of $2,000.
According to a New York Life survey, Gen Z retirement prospects are looking promising: the study found that the average Gen Z worker saved $6,440.67 for retirement in 2023 alone. As far as what percent of Gen Z are saving for retirement, roughly 66% of those in the workforce say they’re actively doing so through a 401(k) or similar plans. In a survey from the CFA Institute, 82% of Gen Z investors said they began investing before they turned 21.
Challenges to retirement savings
Gen Z might face a wide range of challenges when saving for retirement, including the following:
- Less time spent in the workforce to build up Gen Z savings
- Less earning potential than older generations due to just starting out
- Paying off student loan debt
- Rising inflation and cost of living, which leads to less purchasing power of money earned and subsequently less money saved
- Uncertainty around how long will retirement savings last due to longer life expectancy
- Ongoing concerns about whether Gen Z will get Social Security or if Gen Z is going to be able to retire
Despite these hurdles, it's crucial for Gen Z to prioritize their retirement savings to secure their financial well-being in the future.
How can Gen Z start saving for retirement today?
It’s important for Gen Z to understand key retirement planning basics such as budgeting, setting realistic goals, and which type of retirement accounts they can invest in to maximize their savings.
This is especially crucial given that this cohort is seeking to retire earlier than their predecessors. In response to a question on what age does Gen Z want to retire, about 43% of Gen Z workers said they planned to do so before age 65, according to a poll conducted by the Transamerica Center for Retirement Studies.
Roth IRA
A great way for Gen Z to amp up their savings game is by investing in the Roth IRA. This tax-advantaged retirement savings account allows individuals to contribute after-tax income and potentially grow their investments tax-free after the age of 59. It’s one of several valuable tools used for long-term financial planning.
Compound interest
Compound interest is a powerful savings strategy that can significantly boost the growth of investments over time. By starting to save early, Gen Z can take full advantage of compounding, allowing their money to work for them and grow exponentially. Even small contributions made now can snowball into substantial savings later on down the road, providing financial security for retirement.
Employee match
A popular employer-sponsored retirement savings plan is a 401 (k), which allows employees to invest a portion of their salary in a tax-deferred account for retirement. One of its key benefits is that a certain percentage of those contributions are matched by the employer, typically up to a certain limit.
Let’s say a Gen Z employee earns $50,000 per year and their employer offers a 401(k) match of 50% up to 6% of their salary. If the employee contributes at least $3,000, the employer would contribute an additional $1,500 to the 401 (k). This match essentially represents "free money" from the employer, which can significantly boost the growth of the employee's retirement savings over time.
Understanding your 401k and knowing how to take advantage is especially crucial for Gen Z as it provides an opportunity to accelerate their retirement savings without any additional cost to them.
How to maximize retirement savings
So how are Gen Z when it comes to finances? The answer is, they’re more keen than any other generation to improve their financial literacy. Despite facing economic uncertainties and unique financial challenges, Gen Z can take proactive steps to secure their future. Through leveraging a combination of budgeting, goal-setting, seeking professional financial help and putting enough money away for emergencies, they can lay the groundwork for a financially secure retirement.
Create a budget
It is important for Gen Z to create a budget so they can control their finances, avoid unnecessary debt, and set aside funds for short-term needs and long-term goals, such as saving for a home, traveling, or retirement. With rising living costs, student loan debt, and uncertain economic conditions, having a budget helps Gen Z stay on track and cultivate responsible financial habits early on.
Start an emergency fund
Creating an emergency fund for unexpected expenses or financial setbacks is an essential part of financial planning. Like any safety net, it offers peace of mind and financial resilience in times of need such as layoffs or other life challenges.
More significantly, it allows individuals to avoid tapping into their retirement accounts prematurely, which could jeopardize their long-term financial security. Withdrawing money from retirement accounts before retirement age can incur penalties and taxes and potentially hinder the growth of those investments.
Speak with a financial professional
Seeking help with financial planning can provide Gen Zers with personalized advice on retirement, investments, and estate planning. A licensed professional such as a financial planner, insurance agent or investment advisor can help Gen Z navigate the complexities of managing their money and make informed decisions for the best possible outcome.
FIRE movement
Those planning for early retirement may consider the FIRE (Financial Investment, Retire Early) movement as a roadmap to financial freedom. By adopting frugal living habits, investing wisely, and staying committed to their financial goals, Gen Z can pave the way for an early retirement.
However, it's essential to periodically review their retirement plan to ensure it aligns with their evolving financial situation and life goals, especially in the case of major life events such as switching careers or having a baby.
Annuities for retirement
Another option involves using one of four types of annuities to turn a lump sum or series of payments into a steady retirement income stream. The draw of using annuities for retirement lies in their tax-deferred growth and potential for guaranteed income.
As a contract between the investor and an insurance company, annuities allow for the conversion of a lump sum of money into guaranteed income. The funds may also be invested over time and later converted into guaranteed income payments.
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