Gen Z may have a reputation for delaying adulthood milestones like moving out on their own, getting married and having kids, but saving for retirement is one area where the youngest working adults may be outperforming their elders.
Gen Z is the generation most likely to be on track to retire successfully, with 47% of workers aged 24 to 28 currently poised to have enough money to maintain their current lifestyle in retirement, according to a recent study by investment management firm Vanguard.
In total, 42% of all U.S. adults are on track to have enough retirement savings, Vanguard finds. Generationally, millennials come closest to Gen Z’s preparation with 42% of those aged 29 to 44 on track, followed by 41% of Gen Xers (aged 45 to 60) and 40% of baby boomers (aged 61 to 65).
Vanguard examined data from the Federal Reserve’s 2022 Survey of Consumer Finances for over 2,200 U.S. households to estimate the percentage of each generation on track for a successful retirement, defined as having enough money — in most market or longevity scenarios — to maintain their pre-retirement lifestyle throughout retirement.
The study focused on “younger baby boomers, Gen X, millennials, older Gen Z individuals” since those cohorts are most likely to be part of the “working population.”
Though youth may seem like the obvious advantage Gen Z has over older generations, it’s not the only reason so many of them are pacing well to retire comfortably.
Automatic enrollment and time on Gen Z’s side
Part of the reason Gen Z is able to prepare for retirement so early in their careers is due to the rise of employer-sponsored defined contribution plans, such as 401(k) and 403(b) accounts, and auto-enrollment in such plans, Vanguard says.
While some boomers have had the benefit of 401(k) plans or pension funds for much of their careers, Gen Z has benefitted from the proliferation of knowledge around retirement savings and the growing trend of employers automatically enrolling workers into savings plans, says Kelly Hahn, Vanguard investment strategist and co-author of the research paper.
“[Gen Zers are] automatically enrolled in their retirement plans, and oftentimes the savings rates are set for them, and it escalates with time,” she says. “There’s a macro factor of the system improving that’s sort of giving them the tailwind.”
Plus, Gen Z has the benefit of time. While working baby boomers, which Vanguard defines as those aged 61 to 65, may not be able or willing to continue working beyond age 65 in order to meet their retirement goals, Gen Z has decades to let their investments grow and adjust their strategies.
“Gen Z [has] the benefit of the next 40 years of working,” Hahn says. “If we were to assume that people continue to save into the [defined contribution] programs, as well as saving at a higher rate than we have seen with the older generations, then that only propels the retirement readiness number for younger generations.”
Even members of Gen Z who aren’t on track for retirement are still better positioned than their older peers, Vanguard reports. A Gen Z worker earning the median income for their generation of $27,000 a year can expect to face a gap of around $3,000 per year to be able to retire comfortably, the study found, compared with a $9,000 gap for a boomer earning their generation’s median of $56,000 a year.
However, Gen Z may also face a number of challenges when it comes to saving for retirement.
Student debt is one major factor that could impede Gen Z’s retirement if they don’t stay on top of their balances, Hahn says. Though student debt impacts workers from every generation, Gen Z makes up 28% of all student loan borrowers, according to Education Data Initiative. Millennials make up the largest share at 40% of the student debtor population.
“We need people to think about their finances holistically, not just in one silo, one sliver of the overall balance sheet, like retirement savings,” Hahn says. “We want people to think about debt management as well as building emergency savings.”
Additionally, with so much time left in their careers, it’s likely many Gen Zers will change jobs at least a couple of times before retirement. They “need to be cognizant of these switch points,” Hahn says, because often when workers change jobs, they don’t continue contributing to their retirement plan at the same rate at their new job.
“We want people to have a balanced approach of thinking about saving, but also debt management, in order to have a strong financial position going into retirement,” Hahn says. “I think Gen Zers have a tremendous opportunity to implement that, to not be in the position that certain older generations might have gotten themselves into.”
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