The eldest members of Gen Z will reach the ripe old age of 27 this year. It’s safe to say they have a ways to go before reaching retirement. But it’s never too early to start planning for the future.
One of the first aspects to sort out is when they’d like to retire. A recent Principal survey found Gen Z is aiming for an early departure from the workforce with an average desired retirement age of 55. But some might find that challenging to pull off.
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Gen Z’s Financial Prowess
Gen Z first entered the workforce at a difficult time, shortly before the pandemic upended everyone’s lives and led to the highest inflation the U.S. has seen in decades. But in spite of this, the numbers suggest they’re actually doing pretty well.
They began saving for retirement at a median age of 19, according to a recent Transamerica survey, and they have an estimated $29,000 in median retirement savings already. A New York Life survey found the average Gen Z worker saved $6,440.67 for retirement in 2023. This is definitely a good foundation.
If a 27-year-old Gen Z worker has $29,000 in retirement savings today and can invest about $537 per month they could wind up with about $1.32 million at 55, assuming they earn a 10% average annual rate of return. And this doesn’t account for any 401(k) matches they might qualify for, or any future retirement savings rate increases.
If they were to increase their contributions by $200 per month, they could have roughly $2 million by 55, assuming all other factors remain the same. But there are a lot of what-ifs here, and it’s important to understand them so their retirement planning doesn’t go way off track.
Potential Roadblocks
The information above assumes that a Gen Z worker already has some savings and is able to defer a sizable portion of their income toward retirement each month. But that’s not the case for everyone. The Transamerica survey found 11% of Gen Zers have no retirement savings at all, and other surveys put that figure at around 20%. Obviously, these individuals are going to have a harder time retiring at 55 than those who already have a solid savings habit.
Many in Gen Z are struggling with student debt and entry-level salaries, which limits the amount of free cash they have to put toward retirement savings. This isn’t to say it’s not possible for them to save enough for a comfortable retirement, even if they haven’t begun saving at all. But they may have to rethink their timeline.
Gen Z also faces another surprising obstacle in their own expectations. The average Gen Z worker believes they only need to save $250,000 for retirement, according to Transamerica. But that’s a far cry from reality, especially for those who hope to retire at 55.
The average household headed by an adult 65 and older spent $57,818 in 2022, according to the Bureau of Labor Statistics. That number will rise in future years as inflation continues to drive up costs. Based on these estimates, a $250,000 nest egg wouldn’t go far.
Recommendations for Gen Z
Those among Gen Z’s older cohort who are already saving for retirement each month should keep doing what they’re doing, while increasing retirement contributions annually or whenever they receive a raise. Those who haven’t begun saving yet should aim to begin as soon as possible, even if they can only contribute a few dollars per month.
Regardless of the size of their nest egg, they should set aside time to estimate how much they may actually need for retirement if they haven’t already done so. Once they have this number, they can adjust their monthly savings target accordingly.
If retiring at 55 isn’t feasible based on their current savings strategy, there’s still time to make tweaks. Going forward, they should check in at least annually to ensure their plan is on track and make adjustments as necessary.
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