Gen Z is saving more than previous generations, according to a 2022 BlackRock retirement survey. This group had an average savings rate of 14%, compared to the 12% savings rate reported by millennials, Gen X and boomers. A number of factors could be driving Gen Z to save for the future, including an uncertain stock market, inflation and financial experiences during childhood that left an impact.
To understand why Gen Z is saving more for retirement, it can be worthwhile to decipher:
— Savings strategies by generation.
— Early financial lessons.
— Concerns over financial uncertainty.
— A desire to retire early.
What Is Gen Z?
The demographic born between 1997 and 2012 is considered to be Gen Z, according to Pew Research. Individuals in this segment are younger than millennials, whose birth dates range from 1981 to 1996. Gen X refers to the generation born between 1965 and 1980. Boomers were born during the years from 1946 to 1964. While these dates serve a purpose for analysis, they are not an exact science. Individuals in one generation may relate more to the preceding or subsequent segment, in particular if they were born near a bordering year.
Members of Gen Z are digital natives, meaning their first memories involve a world with smartphones. They are familiar with social networks, ecommerce and mobile systems, and have both virtual and in-person life experiences.
[Read: How Much Should You Contribute to a 401(k)?]
Savings Strategies by Generation
Baby boomers entered the workforce at a time when it was common to stay with an employer for years and sometimes decades or an entire career. Upon retiring, some people received a pension that would cover living expenses during non-working years.
However, retirement plan strategies have changed, and employers often take a different approach now. “Over the past few decades there has been a shift from defined benefit to defined contribution pension plans,” says Robert Johnson, a professor of finance at Creighton University. “The baby boomers retiring today began their careers in the defined benefit world.”
Often called a 401(k) or a 403(b) plan, defined contribution plans give employees the opportunity to set aside part of their paychecks for retirement. The amount contributed to a retirement account is typically deducted from taxable income, but taxes are due later when funds are withdrawn in retirement. Some companies offer to provide a match to employee contributions up to a certain amount. Workplace retirement accounts are subject to annual contribution limits.
[See: Jobs That Still Offer Traditional Pensions]
Early Financial Lessons
Many member of Gen Z have memories of the Great Recession of 2008 and 2009. They could have witnessed their parents or loved ones lose a job or home during this time. The same is true for the pandemic. Gen Z individuals might have watched their family go through a tough financial time when businesses shut down. Older Gen Z workers may have lost their own jobs. These experiences have motivated many young employees to establish an emergency fund and build long-term savings accounts.
With so much information readily available, Gen Z participants may be better informed than other generations about financial tools. “There are more convenient accounts you can manage right on your phone, more investment choices, lower cost options and lower minimum investment requirements,” says Scott Butler, a wealth manager and certified retirement counselor at Klauenberg Retirement Solutions in Laurel, Maryland. “Additionally, more and more employer retirement plans are offering the attractive tax-free growth of a Roth saving option.” Roth accounts can be especially beneficial to young investors because taxes are paid in the year the contributions are made and you generally won’t have to pay taxes on the withdrawals in retirement.
Concerns Over Financial Uncertainty
Members of Gen Z may be more aware of financial risks related to a lack of savings. “Younger people are inundated with media stories about the retirement income crisis,” Johnson says. “They see people in the labor market working well past retirement age.” This is often due to a financial need to work rather than choosing to work for social engagement or to stay active.
[See: 10 Important Ages for Retirement Planning]
A Desire to Retire Early
According to the Blackrock report, Gen Z respondents expect to retire at an average age of 63.6, while baby boomers planned to retire at an average age of 65.9. “Certain members of the younger generation are prioritizing saving for retirement early,” says Brian Kuhn, a vice president and financial advisor at Wealth Enhancement Group in Fulton, Maryland. Savers who want to stop working at a young age may have goals such as traveling or spending more time with family.
There are many benefits that can come with setting aside money at a young age. “Those who prioritize saving within retirement accounts early on receive the benefit of compound interest, a sense of accomplishment and security and establish the habit of paying themselves first, which can carry through their whole career,” Kuhn says.
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Why Gen Z is Saving More for Retirement originally appeared on usnews.com
