Gen Z may be known for delaying adulthood milestones like independence, marriage, and children, but saving for retirement is one area where the youngest working adults can outperform older adults.
Gen Z is the generation most likely to be on track for retirement, with 47% of workers currently between the ages of 24 and 28 having enough money to maintain their current lifestyle in retirement, according to a recent study by investment management firm Vanguard.
According to Vanguard research, 42% of all U.S. adults expect to have sufficient retirement savings. Generationally, Millennials are closest to Gen Z readiness, with 42% of 29-44 year olds on track, followed by 41% of Gen X (45-60) and 40% of Baby Boomers (61-65).
Vanguard examined data from the Federal Reserve Board’s 2022 Consumer Finance Survey of more than 2,200 U.S. households to estimate the percentage of each generation that is on track for a successful retirement. A successful retirement is defined as having enough money to maintain your pre-retirement lifestyle in most market or longevity scenarios.
The study focused on “young baby boomers, Gen X, Millennials, and older Gen Z.” This is because these cohorts are most likely to be part of the ‘working population’.
While it may seem like Gen Z’s youth is a distinct advantage over older generations, that’s not the only reason why many of them are on track to retire.
Auto-enrollment and time on the Gen Z side
Part of the reason Gen Z is able to prepare for retirement early in their careers is due to the rise of employer-sponsored defined contribution plans, such as 401(k) and 403(b) accounts, and automatic enrollment in such plans, Vanguard says.
While some baby boomers have benefited from 401(k) plans and pension funds for much of their careers, Gen Z is benefiting from widespread knowledge about retirement savings and an increasing tendency for employers to automatically enroll workers in savings plans, said Kelly Hahn, an investment strategist at Vanguard and co-author of the study.
“(Gen Z) is automatically enrolled in a retirement plan and often has a set savings rate that increases over time,” she says. “There are macro factors of improved systems that seem to be giving them a tailwind.”
Plus, Gen Z has the benefit of time. While working baby boomers, defined by Vanguard as those between 61 and 65, may not be able or willing to continue working beyond age 65 to achieve their retirement goals, Gen Z still has decades to grow their investments and adjust their strategies.
“Gen Z will benefit from working for the next 40 years,” Hahn said. “If we assume that people continue to save into (defined contribution) programs and save at a higher rate than older generations, that will only push up the retirement reserve number for younger generations.”
Vanguard reports that even members of Generation Z who aren’t planning on retiring still have an advantage over their older peers. Gen Z workers, whose peers earn a median annual income of $27,000, can expect to face a gap of about $3,000 a year before they can retire comfortably, compared to a gap of $9,000 for boomers, whose peers earn a median annual income of $56,000, the study found.
It’s not always smooth sailing
However, Gen Z can also face many challenges when it comes to saving for retirement.
Student loans are one of the biggest factors that can prevent Gen Z from retiring if they don’t properly maintain their balances, Hahn said. According to the Education Data Initiative, student loans affect workers of all generations, but Gen Z makes up 28% of all student loan borrowers. Millennials make up the largest proportion of the student debtor population at 40%.
“We need people to think about their finances holistically, and not just in parts of a whole balance sheet, like saving for retirement,” Hahn said. “We want people to think about managing their debt as well as building emergency savings.”
Additionally, with plenty of time left in their careers, many Gen Zers are likely to change jobs at least twice before retiring. “We need to be aware of these tipping points,” Hahn said, because when workers change jobs, they often can’t continue contributing to their retirement plans at the same rate at their new job.
“We want people to have a balanced approach to thinking about not only saving but also debt management to ensure they are in a strong financial position for retirement,” Hahn says. “I think Gen Z has a great opportunity to do that so they don’t end up in the position that certain older generations tend to find themselves in.”
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