For Gen Z, retirement is 40 to 50 years away, but now is the perfect time to start saving. Investing early and building healthy financial habits are the keys to a successful retirement. Four financial experts shared their top strategies to start saving for retirement.
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For Gen Zers just entering the workforce, retirement may be too far in the future to worry about.
Or it may seem daunting and anxiety-provoking, especially as Gen Zers juggle student loan debt, high costs of living, and a tough job market. And as the national debt increases, many young workers are increasingly worried that they will no longer have access to the same resources that boomers have today, such as Social Security and Medicare.
Only 15% of Gen Zers put a certain percentage of their paycheck into a savings account each month. And according to Bank of America, only 20% of people contribute to a 401(k) or retirement account.
But when it comes to saving for retirement, it’s never too early. In fact, the biggest advantage Gen Z has is time.
Business Insider asked four wealth advisors for their best tips and tricks on how Gen Z can maximize their retirement savings starting now.
Andrew Crowell, Vice Chairman of Asset Management at DA Davidson
For Crowell and other experts, the biggest retirement advice is deceptively simple. It’s called “start early.”
“Even by allocating small amounts to investments, your money can double every seven to 10 years,” Crowell said. That means for Gen Zers in their 20s just starting out in their careers, their money could be at least quadrupled.
Take advantage of a retirement plan at work, such as a 401(k), where you can contribute a portion of your paycheck to an account. Employers often match employee contributions up to a certain percentage, usually between 3% and 6%.
For long-term investments, Crowell recommends putting your money into high-yield assets such as stocks so that your savings aren’t eroded by inflation. The S&P 500 has returned 13% annually over the past 10 years, well above the rate of inflation.
Basic budgeting strategies, such as keeping housing costs below 30% of your total salary, can also lay a solid foundation for retirement savings, Crowell said. However, there is no need to panic if rent becomes a large proportion of your take-home income and you are unable to save as much as you would like.
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“Their peak income potential is several years down the road, and they feel that the cost of living alone is very expensive,” Crowell said of Gen Z.
There is no such thing as too little savings. “It’s less about how much you save from your paycheck and more about just getting started. You can always increase it in the future,” Crowell added.
Ayako Yoshioka, Senior Portfolio Manager, Wealth Enhancement Group
Yoshioka pointed out that there are other ways to save for retirement besides the traditional 401(k). Self-employed individuals can save for retirement and enjoy tax-deductible contributions with a Simplified Employee Pension (SEP) IRA.
A Roth IRA, which allows you to contribute after-tax amounts to fund your retirement, is also a great option, Yoshioka said. Once placed within a Roth IRA, contributions and earnings grow tax-free and can typically be withdrawn tax-free in retirement.
For those who like to pick individual stocks and funds, opening a brokerage account and building your own portfolio is another way to invest your savings. However, Yoshioka warns those who trade stocks that profits from their investments will be subject to capital gains tax.
When it comes to saving for retirement, it’s important to keep the big picture in mind. There is no doubt that the stock market has boom and bust cycles, but Mr. Yoshioka said that he wants people to continue investing. During the Great Financial Crisis, some people took their money out of the market to protect their assets and never got it back.
“If they don’t come back, they will have cash, but inflation will eat away at it and they will miss out on the huge growth in the stock market,” Yoshioka said.
For Gen Z, who have less experience with economic cycles, it’s important not to panic in the short term. The stock market typically recovers within a year, but this is only a temporary decline in a 50-60 year retirement portfolio.
Ashley Weeks, Wealth Strategist at TD Bank
Weeks said that now, more than ever, retirement success is highly dependent on personal savings.
Historically, retirement income has come from what is known as the “tripod” of Social Security, pensions, and personal savings. But today, Weeks points out, less than 15 percent of individuals in the private sector are eligible for pensions, and the future of Social Security is uncertain. This means that the burden of adequate retirement is increasingly falling on individuals.
Weeks said target-date funds can be a useful tool for saving for retirement. Many companies’ 401(k) plans offer these plans, which automatically rebalance the composition of your portfolio as you approach retirement, minimizing risk. Target-date funds typically allocate more to riskier assets such as stocks initially, and increase exposure to less volatile bond holdings over time.
It’s important to have the right mindset when it comes to saving for retirement. “Start saving early and treat your retirement savings like your monthly living expenses,” says Weeks.
Alana Morley, Ameriprise Private Wealth Advisor
In Morley’s view, developing basic budgeting habits is the key to success in retirement.
While there’s no one-size-fits-all budgeting method, one popular strategy recommended by Morley is the 50/30/20 rule. This means that 50% of your after-tax income goes towards essential expenses and 30% towards discretionary expenses. 20% for savings or other financial goals such as retirement or buying a home.
But before saving for retirement, Morley suggests first building a basic savings fund for emergencies by putting money in a bank or high-yield savings account. Once you’ve saved enough money to cover a few months of essential living expenses, it’s time to start considering contributions to a 401(k) or other retirement plan.
Morley also recommends automating payments as much as possible. Credit card payments, rent payments, savings, and 401(k) contributions can all be automated, reducing unnecessary effort and promoting healthy financial habits.
And if possible, avoid credit card debt.
“If you’re paying 20% interest on your credit card, you’re paying 20% more on everything,” Morley said. That can quickly erode your ability to save. If you have credit card debt, check the interest rate you’re paying and make a plan to start paying it off.
“These habits are hard to change or create later on, and it’s hard to recover your savings later on,” Morley says.
