According to a 2022 BlackRock retirement survey, Gen Z is saving more than previous generations. This group had an average savings rate of 14%, compared to 12% for millennials, Gen X, and boomers. A number of factors, including an uncertain stock market, inflation, and financial experiences as a child, may be motivating Gen Z to save for the future.
To understand why Generation Z is saving more for retirement, consider the following:
- Savings strategies by generation.
- Early financial lessons.
- Concerns over financial uncertainty.
- A desire to retire early.
What Exactly Is Generation Z?
According to Pew Research, Gen Z refers to people born between 1997 and 2012. Individuals in this segment are younger than millennials, who were born between 1981 and 1996. The Gen X generation was born between 1965 and 1980. Baby boomers were born between 1946 and 1964. While these dates are useful for analysis, they are not precise. Individuals in one generation may feel more connected to the preceding or following generation, especially if they were born near a bordering year.
Savings Strategies By Generation:
Baby boomers entered the workforce at a time when it was common to stay with one employer for years, decades, or even a lifetime. Some retirees received a pension to cover living expenses during their non-working years.
However, retirement plan strategies have evolved, and employers frequently adopt a new approach. “Over the last few decades, there has been a shift from defined benefit to defined contribution pension plans,” says Creighton University finance professor Robert Johnson. “Today’s retiring baby boomers began their careers in the defined benefit world.”
Defined contribution plans, also known as 401(k) or 403(b) plans, allow employees to set aside a portion of their paychecks for retirement. Contributions to retirement accounts are usually deducted from taxable income, but taxes are due when funds are withdrawn in retirement. Some companies will match employee contributions up to a certain amount. Annual contribution limits apply to workplace retirement accounts.
Early Financial Lesson:
Many members of Generation Z recall the Great Recession of 2008 and 2009. During this time, they may have witnessed their parents or loved ones lose a job or their home. The same can be said for the pandemic. People in Generation Z may have witnessed their families struggle financially as a result of business closures. Older Generation Z workers may have lost their jobs. Many young employees have been inspired by these experiences to establish an emergency fund and long-term savings accounts.
With so much information readily available, Gen Z participants may be more knowledgeable about financial tools than previous generations. “There are more convenient accounts you can manage right on your phone,” says Scott Butler, wealth manager and certified retirement counselor at Klauenberg Retirement Solutions in Laurel, Maryland. “Additionally, an increasing number of employer retirement plans are providing the appealing tax-free growth of a Roth saving option.” Roth accounts can be especially beneficial to young investors because taxes are paid in the year contributions are made and withdrawals are generally tax-free in retirement.
Concerns Over Financial Uncertainty:
Members of Generation Z may be more aware of the financial risks associated with a lack of savings. “Younger people are bombarded with media stories about the retirement income crisis,” says Johnson. “They see people working well past retirement age in the labor market.” This is frequently due to a financial need to work rather than a desire to engage in social activities or stay active.
A Desire to Retire Early:
According to the Blackrock report, Gen Z respondents expect to retire at the age of 63.6, while baby boomers expect to retire at the age of 65.9. “Some younger generations are prioritizing early retirement savings,” says Brian Kuhn, vice president and financial advisor at Wealth Enhancement Group in Fulton, Maryland. Savers who want to retire early may have goals such as traveling or spending more time with family.
There are numerous advantages to starting to save money at a young age. “Those who prioritize saving in retirement accounts early on benefit from compound interest, a sense of accomplishment and security, and establish the habit of paying themselves first, which can carry over their entire career,” Kuhn says.