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Gen Z is facing its fair share of financial issues, but it's also putting past generations to shame when it comes to getting a jump on retirement savings.
Workers aged 18 to 24 in 2021 were 32% more likely to invest in their workplace retirement plan than their older colleagues were at their age, according to a new report by Vanguard that looks at generational changes in 401(k) behaviors. Vanguard analyzed the contribution rates of 219 401(k) programs offered by the same employers since 2006, comparing workers to previous generations at the same age.
Younger generations usually have a lower participation rate than older generations; they don't necessarily have the same knowledge about their retirement savings options and they typically have less money to save. Still, Gen Z’s participation rate in 2021 was more than twice as high as similarly-aged employees in 2006: 62% of 18- to 24-year-olds were contributing in 2021, compared to 30% in 2006.
"It is encouraging to see that younger workers continue to prioritize their retirement savings, even more so than past generations, because starting early allows you to take advantage of years of compounding returns,"says Matt Fleming, a certified financial planner and senior financial advisor at Vanguard.
Automatic enrollment in a 401(k) plan was a major reason why, according to the report. In 2006, only about 11% of employers in the study offered automatic enrollment. By the end of 2021, half of the plans did. That lead to a major increase in the 401(k) participation rate, from 62% in 2006 to 82% in 2021. But among plans offering automatic enrollment, participation soared to 94% in 2021.
Often, the biggest hurdle to saving for retirement is just getting started. Many people are held back by believing they don't have the proper knowledge required to invest. But automatic enrollment bypasses that lack of confidence. And thanks to recent legislation, automatic enrollment could become even more common in the years to come.
Another big change over the past 15 years: Employees in every generation are saving a lot more, per the report. Savers were deferring an average of 7.2% of their paychecks into their 401(k)s in 2006. That increased to 7.7% in 2021.
Overall, the median account balance across generations tripled, from $9,680 to $29,762.
Knowledge of the benefits of saving early can also probably partially explain the increase. Baby boomers were the first generation to have access to a defined contribution plan like a 401(k) for a "meaningful" portion of their working lives, the report notes. As years passed, more and more people learned about the benefits.
The benefits of investing early
All of this is good news, according to financial professionals. "Start early" is a maxim of the personal finance advice; it is one of the best ways to build a substantial retirement fund.
That's because the more time funds are invested in the stock market—and a 401(k) is an investment account—the more time they have to grow and compound.
And workers will want to put those years of compounding to their advantage. According to some financial planners, many workers will need more than $1 million to retire comfortably thanks to inflation—that number will only increase in the coming decades, as Gen Z gets older.
That said, you don't need to contribute much to get started. Saving for retirement is a marathon, not a sprint. Though the average deferral rate across generations was 7.7% in 2021, Gen Z's was 4.7%. Even if you can only afford to contribute less than that—say 1% or 2%—at least you're getting started. (Still, most experts advise at least up to the full employer match, to maximize your benefits.) Fleming recommends increasing your contributions by 1% to 2% each year.
In addition to growing your net worth, traditional 401(k) contributions also lower your taxable income. You invest money (up to $22,500 in 2023 for those under 50) before it is taxed by the government, and it grows tax-deferred until it’s withdrawn in retirement.
Of course, Vanguard's report only represents those with access to a 401(k) plan. Many workers aren't offered one.
But there are still ways to invest for retirement. Many financial experts recommend using a Roth IRA when you're young. With these accounts, you contribute money that has already been taxed, and then when you make a qualified distribution in retirement, it's tax free. The contribution limit for these accounts in 2023 is $6,500 for those under age 50.
