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Gen Z: Why It Is Never Too Early to Start Planning for Retirement

As members of Generation Z enter the workforce, they should also start planning for retirement. Even though retirement is decades away, acting now can lead to better financial security throughout your entire life.

Here are five reasons why Gen Z should start saving for retirement sooner rather than later.

#1: Your smaller contributions benefit from long-term compound growth

One of the best reasons to start planning for retirement early is the concept of compound growth. You may just be starting out with an entry-level job while handling student loan payments. Although you might feel like you don’t have enough money left over to invest in your retirement fund each month, even small contributions in your early 20s have the potential to grow exponentially by the time you’re ready to retire.

How compound growth works

Say you start contributing $100 a month to a retirement fund when you’re 22 years old. You plan to retire at age 67. Without changing your annual contribution amount as you make more money, your total contribution over that period of time would be $54,000. But, assuming a 7% average annual return over the same period, your account could be worth around $380,000 by retirement.

Small amounts continue to grow along with your additional contributions because of compound growth. And if you incrementally increase your contributions as your income grows, you’ll be well-positioned for a comfortable retirement.

#2: You have fewer financial responsibilities

You may feel cash-strapped when you’re just starting out in the workforce. However, you actually likely have more flexibility in your lifestyle and financial responsibilities. You probably don’t have kids or other dependents relying on you. And if you’re single, you have total control over your budget.

Small lifestyle changes help you save more

Take advantage of this period of life by thinking about how you prioritize your spending and saving. Consider small changes such as cancelling one subscription service or lowering your phone data plan. Then stick that extra cash from your budget into your retirement plan. As noted above, even scrounging up an extra $100 a month now can snowball into a significant sum.

Plus, it often makes sense to have a higher percentage of diversified stocks when you’re younger, offering the potential for your money to earn a higher return. And if there is a dip in your stocks’ value, you have plenty of time to make up for losses. As you get older, you can adjust your investment portfolio to favor assets with lower risk.

#3: You won’t have to save as much later in life

If you are in Gen Z and you start planning for retirement early, you won’t have to play catch-up as you get older. Remember the example where saving just $100 a month starting at age 22 could add up to $380,000 by retirement age? You’ll have to make much larger contributions to get there if you wait. Starting at 42 years old, you would have to contribute nearly $500 a month just to reach the same amount.

How much you actually need to retire

If a Gen Z member were to target $1.5 million in retirement savings, they would need to save about $1,850 a month to reach that goal when starting in their early 40s. (assuming 7% annualized return over 25 years)

In this scenario, if you start investing $100 a month in your early 20s, you could then increase that amount little by little each year. Then you’d consistently save a little more each year without feeling a major financial strain. You also would have more flexibility to pay for other priorities or unexpected expenses.

#4: You likely qualify to max out tax-advantaged IRAs

An IRA is a tax-advantaged account that can be a great way to invest. The biggest benefit is lowering your tax bill. There are two types of IRAs to choose from:

  • Traditional IRA
    • Contribute up to $6,000 annually in 2021
    • Deduct contributions from taxable income for that tax year if you qualify
    • Pay income tax on withdrawals
  • Roth IRA
    • Contribute up to $6,000 annually if you qualify
    • Pay income tax on your contributions
    • Withdrawals are tax-free during retirement

With deductible contributions to a traditional IRA, you can save on taxes now. With a Roth IRA, you pay taxes now and take out the money tax-free during retirement.

You can only make deductible contributions to a traditional IRA or contribute directly to a Roth IRA if your income is lower than the maximum thresholds, making both of those options particularly compelling for Gen Z. Lastly, while you may be able to contribute to both a Roth and traditional IRA, the $6,000 contribution limit is the total you can contribute to all IRAs in one year.

For the 2021 tax year, a single tax filer must make less than $125,000 in order to qualify. That target is pretty easy to hit when you’re just starting your professional career. As you get older, your income will also grow, and you may not be eligible to make the full annual contribution into a tax-advantaged Roth account.

#5: Investing is easier than ever

Access to investing has exploded in recent years. You can take advantage of easy, inexpensive ways to jump-start your retirement planning. Mobile apps let you automatically transfer small amounts of cash into an investment or high-yield savings account. And digital budgeting tools, such as Mint, help you track every dollar so you can make the most of your money.

You can set spending alerts, get instant balance notifications and more. Take advantage of these tools to get an early handle on your money, no matter how much you earn. Digital tools help you find ways to control your money and plan for your future — including retirement.

The Bottom Line

If you’re a member of Gen Z, you might not know exactly where to start with your retirement planning. After all, how do you plan for something that’s more than 40 years away? Working with a CERTIFIED FINANCIAL PLANNER™ professional can help you get started, while also anticipating the unknown.

Whether you need help navigating a job offer or you’re unsure of how to handle an inheritance, talk to a CFP® professional. You will learn how to make smart financial decisions and feel confident in your financial future.

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