The earlier you start saving, the better: that’s a golden rule of building wealth.
Gen Z - those aged 14 to 29 - are currently in that sweet spot to make serious headway long before retirement.
“The longer we wait to save, the more we're gonna have to save to get the dollar amount we need to retire on at retirement age,” Trent Von Ahsen, managing partner at wealth advisory firm Cedar Point Capital Management, told The Independent in an email.
Let’s take the median-aged Gen Zer, at 21, who wants a comfortable retirement - no side hustles, medical expenses covered, and some vacations. (And with no mortgage, car loan or other debts to their name.)
Based on the rate of inflation, when this Gen Zer hits 65 in 2070, they would likely need $3.7 million. So how does one get there?
That’s a matter of simple math. But staying consistent with a long-term retirement plan is easier said than done.
Million-dollar numbers
At one time, aiming to have $1 million at retirement was a decent goal as sensible spending could make that money last until a retiree dies.
In reality, $1 million today will have a third of its purchasing power in 2070 because of inflation, Von Ahsen said.
Because of that, Gen Z should aim for $3.7 million saved by 65 to have a comfortable retirement. That’s because that figure in 2070 has roughly the same purchasing power as $1 million today.
Here’s how much Gen Z needs to save every month to reach that goal. The numbers below assume that your money earns interest of around 10 percent every year - a good rule of thumb for the kind of investments found in retirement accounts - and that inflation is around 3 percent every year:
- 20 years old: Around $420 month
- 25 years old: Around $585 a month
- 29 years old: Around $770 a month.
“Those figures assume consistent monthly investing,” Von Ahsen said. “They're illustrations and not promises, but they show how much starting early can reduce the amount you need to contribute.”
That said, $420 a month may not be in the cards for a 20-year-old navigating high prices for everything from groceries and gas to housing.
“For some, balancing rent, student loans, and an entry-level [paycheck], several $100 a month can be a significant stretch,” Von Ahsen said.
Generational advantage
The beauty of being Gen-Z is that time is on their side. They have decades to let their contributions and compound interest build their balance toward a comfortable retirement nest egg that has enough purchasing power to last them the rest of their life.
Once retirement hits, individuals start pulling money out of their retirement accounts - sometimes without taxes - to pay for everyday expenses such as medical bills, housing and groceries.
That’s why it’s important to make contributions to a retirement account - 401(k)s and IRAs are popular choices - instead of stashing money in a savings account.
The investments in those accounts usually build exponential returns over time through compound interest. So, even a small amount invested each month - $50, for example - has the potential to create big returns by the time you retire.
“You don’t need to have retirement figured out to start preparing for it,” Nassau Financial Group CGO Tom Buckingham told The Independent in an email.
“Start with what works for your budget, make saving a habit and increase it as your income grows. Time gives this generation an advantage that’s hard to make up for later.”
Contribution conundrum
Gen Z should plan to increase their contribution amounts as time goes on and they make more money, to ensure the money they stash away for retirement has a good chance of lasting through their golden years.
One way to boost payments when you’re younger is to contribute to a workplace 401(k).
Most have employer matches, which means the employer will also contribute to the account when the employee makes contributions (up to a certain limit).
Another way to keep retirement contributions on track is to save up an emergency fund that can cover three to six months of expenses. Doing so means you may not have to dip into money you’d use for contributions to cover the cost of an unexpected expense or job loss.
“My one takeaway message would be to start with what you can afford today and make increasing it part of your plan,” Von Ahsen said. “You don't need to have your entire financial life figured out to begin. The most important part is getting started.”
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