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Gen Z is facing its fair share of financial issues, but it’s also putting past generations to shame when it comes to getting a jump on retirement savings.
Workers age 18 to 24 in 2021 were 32% more likely to invest in their workplace retirement plan than their older colleagues were at their age, according to a new report by Vanguard that looks at generational changes in 401(k) behaviors. Vanguard analyzed the contribution rates of 219 401(k) programs offered by the same employers since 2006, comparing workers to previous generations at the same age.
Younger generations usually have a lower participation rate than older generations; they don’t necessarily have the same knowledge about their retirement savings options, and they typically have less money to save. Still, Gen Z’s participation rate in 2021 was more than twice as high as similarly aged employees in 2006: 62% of 18- to 24-year-olds were contributing in 2021, compared with 30% in 2006.
Automatic enrollment in a 401(k) plan was a major reason why, according to the report. In 2006, only about 11% of employers in the study offered automatic enrollment. By the end of 2021, half of the plans did. That led to a major increase in the 401(k) participation rate, from 62% in 2006 to 82% in 2021. But among plans offering automatic enrollment, participation soared to 94% in 2021.
Often, the biggest hurdle to saving for retirement is just getting started. Many people are held back by believing they don’t have the proper knowledge required to invest. But automatic enrollment bypasses that lack of confidence. And thanks to recent legislation, automatic enrollment could become even more common in future.
Another big change over the past 15 years: Employees of every generation are saving a lot more, per the report. Savers were deferring an average of 7.2% of their paychecks into their 401(k)s in 2006. That increased to 7.7% in 2021.
Overall, the median account balance across generations tripled, from $9,680 to $29,762.
Knowledge of the benefits of saving early may also partially explain the increase. Baby boomers were the first generation to have access to a defined contribution plan like a 401(k) for a “meaningful” portion of their working lives, the report notes. As years passed, more and more people learned about the benefits.
The benefits of investing early
All of this is good news, according to financial professionals. “Start early” is a maxim of the personal finance advice; it is one of the best ways to build a substantial retirement fund.
That’s because the more time funds are invested in the stock market—and a 401(k) is an investment account—the more time they have to grow and compound.
And workers will want to put those years of compounding to their advantage. According to some financial planners, many workers will need more than $1 million to retire comfortably thanks to inflation—that number will only increase in the coming decades, as Gen Z gets older.
That said, you don’t need to contribute much to get started. Saving for retirement is a marathon, not a sprint. Though the average deferral rate across generations was 7.7% in 2021, Gen Z’s was 4.7%. Even if you can only afford to contribute less than that—say 1% or 2%—at least you’re getting started. (Still, most experts advise at least up to the full employer match, to maximize your benefits.)
In addition to growing your net worth, traditional 401(k) contributions also lower your taxable income. You invest money (up to $22,500 in 2023for those under 50) before it is taxed by the government, and it grows tax-deferred until it’s withdrawn in retirement.
Of course, Vanguard’s report only represents those with access to a 401(k) plan. Many workers aren’t offered one.
But there are still ways to invest for retirement. Many financial experts recommend using a Roth IRA when you’re young. With these accounts, you contribute money that has already been taxed, and then when you make a qualified distribution in retirement, it’s tax free. The contribution limit for these accounts in 2023 is $6,500 for those under age 50.
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FAQs
A recent 401(k) participant study conducted by Charles Schwab found that members of Gen Z are optimistic they will retire sooner than other generations, as the average age at which they expect to retire is 61 years old, whereas Millennials expect to retire at 64, members of Gen X expect to retire at 65 and Baby Boomers ...
Is Gen Z saving more for retirement than previous generations? ›
Share of Gen Z households with retirement accounts is three times that of Gen Xers at the same age. Washington, DC; February 6, 2024—According to new research published by the Investment Company Institute (ICI), Gen Z households with DC plans are outpacing earlier generations on the path to retirement saving.
Why is Gen Z struggling financially? ›
More than half, or 53%, of Gen Zers say higher costs are a barrier to their financial success, according to a separate survey from Bank of America. In addition to soaring food and housing expenses, millennials and Gen Z face other financial challenges their parents did not as young adults.
What does retirement look like for Gen Z? ›
Gen Z are more bullish on early retirement than millennials—and the majority think they'll be able to get by on just $500,000 in savings. Some Gen Zers anticipate working for just two decades before kicking up their feet and living off just $500,000 for the following 60 years.
How much do Gen Xers save for retirement? ›
A recent study from the National Institute on Retirement Security (NIRS), a nonprofit research organization, found the typical Gen X household has $40,000 in retirement savings, while the average has $153,300, according to Fidelity Investments, far less than the $1.1 million they think they'll need.
Are millennials screwed for retirement? ›
About 38% of early millennials, those born in the 1980s, will have “inadequate” retirement income at age 70, according to projections from a 2022 Urban Institute study. By comparison, 28% to 30% of early and late boomers and 35% of early Gen Xers are projected to have inadequate income, according to the study.
Which generation saves the most money? ›
"Gen Z savers, on average, have higher account balances than their predecessors in part because they are investing earlier and often and taking advantage of retirement plan benefits." Many Gen Z employees are graduating with less debt and are highly educated, which allows them to put aside more for their retirement.
Why will Gen Z not retire? ›
This belief stems from a variety of factors, but a major reason is the current job market. Minimum wage is largely stuck at the same as it was 13 years ago and Gen Zers don't believe the pay they get for the work they do allows them a good quality of life, the McKinsey study cites.
What is the average income for Gen Z? ›
For those between 45 to 64 years old, the median income is $60,998, and for those age 65 and over, $41,013. As a whole, however, Gen Z had the lowest salaries in the country — specifically Gen Z in West Virginia, with a median income of $27,380.
Is Gen Z financially savvy? ›
For example, a new study by the Investment Company Institute (ICI) finds that “Gen Z households have nearly three times more assets in the [retirement] plan accounts (adjusted for inflation) that Gen X households did at the same age.” More Gen Z-ers have retirement plans set up and they've saved more in those accounts.
Baby boomers and Gen Xers, on average, said they're expecting to work longer than younger generations, with boomers saying they'll likely retire around age 72 and Gen Xers saying 67. Meanwhile, millennials expect to retire around 64 while the average Gen Zer says, perhaps a tad too optimistically, 60.
Will Gen Z be able to afford houses? ›
Gen Z seems to have a bit of savvy when it comes to the housing market. For example, many Gen Z homebuyers managed to take advantage of lower interest rates in 2020 and 2021. Since then, interest rates have increased to 7-8% depending on the loan. Interestingly enough, that rate hike isn't scaring Zoomers either.
What is Gen Z life expectancy? ›
The members of Generation Z, the oldest of which are now in their 20s, on average are expected to live to 100 and beyond. Health technology may or may not eventually lift Gen Zers well past that.
Is Gen Z better at saving money? ›
Intuit's most recent Prosperity Index Study explains how Gen Z is leading the wave with this “softer” approach to life and finances. According to the study, 3 out of 4 Gen Zers say they'd rather have a better quality of life than extra money in the bank.
What makes Generation Z different from older generations? ›
Gen Z (or Generation Z) grew up with rapid digital changes. As teens, Gen Zers experienced the boom of smartphones, wearables, and virtual assistants, among other disruptive tech. This immersion makes them open to integrating new technology into their lives. Gen Z is already using AI in their daily lives.
Does the saving rate vary from generation to generation? ›
That's truer for some more than others: Even though Fidelity found that asset balances have increased by $40,000 across generations, the current savings rates of various age groups vary widely.
Which age group has the least amount saved for retirement? ›
Average Retirement Savings Balance by Age
| AGE | AVERAGE RETIREMENT ACCOUNT BALANCE |
|---|
| Younger than 35 | $49,130 |
| 35-44 | $141,520 |
| 45-54 | $313,220 |
| 55-64 | $537,560 |
2 more rows