Insights

Generation Z, Prepare for Retirement Fund Sticker Shock

Generation Z — those born between 1997 and 2012 — are the newest workers on the scene and, despite the pandemic, inflation, and everything else we’ve gone through in the last few years, they remain optimistic about their futures. Their average estimated retirement age is 63.6, according to a recent BlackRock survey. That’s nearly 2.5 years earlier than when most baby boomers plan to retire.

But when you dig below the surface, some major red flags arise. And left uncorrected, they could leave Gen Z in a real pickle when it comes time to retire.

Image source: Getty Images.

Being too optimistic can be a problem in retirement planning

It’s impossible for anyone to predict exactly how much they’ll spend in retirement, which is why it’s always better to be a little too pessimistic about your expenses than too optimistic. If you save more than you need, you’ll have a little extra to pass onto your heirs. If you save too little, you’re going to have serious problems paying your bills.

While people of any generation can make this mistake, it seems especially common among younger workers. About 36% of Gen Z respondents surveyed said they would need a nest egg of less than $250,000 to retire comfortably, according to BlackRock. The same survey found that baby boomers estimated they’d need anywhere from $1 million to $3 million. So who’s right?

Well, the answer could be both or it could be neither. But let’s look at some averages. The typical household headed by an adult 65 or older spent about $47,579 in 2020, according to the Bureau of Labor Statistics. It’s reasonable to assume that number would be higher now due to inflation. Let’s say $50,000 per year, for simplicity’s sake.

At that rate, you’ll burn through a $250,000 nest egg in about five years if you’re paying for all your retirement expenses on your own. If you have Social Security or a part-time job to help you, you may be able to stretch it a little further, but it’s probably not going to last 20 or 30 years — but your retirement might.

A nest egg of $1 million has a much better chance of lasting, but even that probably won’t afford an extravagant lifestyle. Inflation will continue to drive up costs and it’s possible that Social Security may not cover as much in the future as it does today. So it’s always best to estimate a little too high rather than too low when calculating your retirement needs.

Don’t wait to start saving for retirement

An underestimation of your retirement needs could lead you to save too little for your future right now. The BlackRock survey found that 72% of Gen Z workers would save less for retirement if they were faced with other big-ticket goals. That might not seem like a problem when you still have decades until retirement, but you could pay for it as you age.

The retirement contributions you make when you’re younger often end up being some of the most impactful. That money has four decades or more, in some cases, to remain invested. This can generate a lot of earnings, which in turn decreases the amount you have to save to reach your target retirement goal.

But if you save too little or don’t save at all right now, you’ll have to work much harder later on in your career to make up for it. You can save $1 million by 65 by setting aside just $403 per month starting at 25 if you earn a 7% average annual rate of return. But if you wait until 30 to begin, you now have to save $582 per month to reach your goal. That’s an extra $75,180 out of your pocket over your career.

I know retirement can feel really far away when you’re young, but those years will slip by faster than you expect. And you’ll be a lot better prepared to meet the financial challenges you’ll face as a retiree if you take the time now to calculate a realistic retirement savings goal and build a consistent monthly savings habit. It might mean saying no to a few things you want to do now, but it’s worth it to be able to enjoy a financially secure future.

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