Yahoo Finance Here’s How Early the Average Gen Zer Starts To Save for Retirement Compared to Boomers
When it comes to retirement savings, Gen Z will be dealing with a set of problems that haven’t been seen before. Unlike their Baby Boomer predecessors, members of Generation Z have to think about saving for their golden years much earlier.
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This necessary shift in preparing for retirement raises several different questions. Why does Gen Z need to start sooner? How much do people believe they’ll need for a comfortable retirement, and how has this figure changed over time?
Most importantly, are Gen Zers taking the right approach to secure their financial future?
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Not Necessarily a Head Start: Gen Z vs. Baby Boomers
People used to think of planning for retirement when they were getting close to the age when they’d be clocking out for the last time. Those days are gone. For Baby Boomers, retirement savings often took a backseat until their 40s or 50s, partly due to the greater economic stability and the common practice of pensions provided by employers.
Things are much different for Gen Z. With the ongoing obligation of student loans looming large and pension plans becoming largely a thing of the past, many young adults need to start thinking about their financial future sooner rather than later.
The Changing Size of the Retirement Nest Egg
The amount most working people believe they need to face their retirement age comfortably has been steadily growing over time. While the goal of having a cool $1 million might have seemed more than enough for a worry-free retirement, that figure isn’t likely to be sufficient when today’s youngest working generation finally gets to retirement age.
Many financial experts suggest setting aside $2 million to $3 million, if not more, to account for Gen Z workers’ longer life expectancies, rising healthcare costs and the uncertain future of Social Security.
The Strategy Behind Early Savings
Gen Zers face higher housing prices, more expensive healthcare and an ever-rising cost of living. So, how can they save more than their predecessors for their eventual retirement?
Starting early is the best strategy. If you start saving at 25, you’ll need to set aside a little over $2,000 a month to reach that $2 million savings goal by the time you retire. For many Gen Z workers, that seems as out of reach as home ownership, but it’s something they should be working for.
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Time Is Still on Your Side: The Power of Compound Interest
Compound interest is one tool Gen Z workers have at their disposal. If you start saving $2,145 a month at 25 and can find a savings account with an average annual return of 3% or more, you could hit that magic $2 million amount by the time you’re 65.
However, if you put off saving until you’re 30, you’d have to sock away around $2,690 per month at the same interest rate to reach that $2 million, and the lesson here is clear. The earlier you start, the less financial strain you’ll feel each month and the more time your money will have to grow through the magic of compound interest.
One more caveat: The money in your retirement account needs to stay there for this strategy to work.
Speaking of Interest: Keep an Eye on Inflation
Most savings accounts traditionally offer lower interest rates than the rate of inflation. While this is often overlooked, it’s a crucial factor in managing your savings over time, as the inflation rate significantly erodes their value.
For instance, the U.S. inflation rate has hovered around 3.5% this year. After a year, the real value of the $1,000 you’ve stashed in a shoebox under the bed right now would only be worth around $965 next year.
Even a savings account offering a 4% annual interest rate can help that hypothetical $1,000 retain its value and even grow to around $1,040 yearly.
Adjusting for that 3.5% inflation, the purchasing power of your savings would still only be about $1,004, barely offsetting the price of inflation and not doing much to meaningfully increase your wealth. Look into high-yield savings accounts, like some offered by online banks or credit unions, which may provide interest as high as 7%.
Final Take
Unless something drastically changes in our economy — for the better — Gen Z will find it challenging to prepare for the “golden years.” The best approach is to be proactive, leverage high-yield savings accounts when you can find them and keep a closer eye on your cash flow.
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This article originally appeared on GOBankingRates.com: Here’s How Early the Average Gen Zer Starts To Save for Retirement Compared to Boomers
