Gen Z may be known for blowing money on the latest Taylor Swift concerts or luxury trips, but behind young people’s passion for extravagant spending lies a responsible financial habit: investing for retirement.
In fact, the younger generation may be more prepared to retire than their older cohorts. Nearly half of Gen Z workers (ages 24 to 28) in the United States are expected to maintain their current standard of living in retirement, slightly ahead of the 40% projected for baby boomers (ages 61 to 65) approaching retirement, according to a new study from investment manager Vanguard.
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Millennials (ages 29 to 44) were also slightly ahead of the older generation, with 42% on track for retirement. Generation X was slightly behind, with 41% (between 45 and 60 years old).
Vanguard based its findings on data from the 2022 Survey of Consumer Finances, using nearly 2,700 U.S. working households to estimate how each generation is progressing toward retirement and whether income at that stage would be enough to maintain their lifestyle without exceeding their spending needs.
Gen Z’s financial readiness may surprise older generations, who tend to believe that young people are spending like there’s no tomorrow or making non-essential purchases instead of acquiring what they need to reach adult life milestones.
While soaring inflation, high costs of living and stagnant wages are pushing baby boomers back into the workforce, young savers may be taking these headwinds as a financial lesson.
What helps generation Z save
Part of this financial preparedness is due to the expansion of defined contribution (DC) plans offered by employers. For younger people, these plans can make saving easier and more efficient with features like automatic enrollment, automatic contribution increases, and target-date fund investments.
Additionally, a separate Vanguard study found that participation and eligibility rates in DC plans are at the highest levels on record, which can help workers build financial security over time.
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Additionally, the study highlighted that if all workers had access to a DC plan about 6 in 10 Americans would be on track for retirement. More than 100 million Americans have access to these plans, which total more than $12 trillion in assets.
But access to retirement funds is not universal. A separate analysis showed that 42% (about 40 million) of workers do not have access to this option, particularly in the case of low-paying jobs and part-time positions.
However, although younger people are directing money towards their corporate pensions, the future of any further progress depends on their overall financial well-being.
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Even with their success in saving, many people in this generation face debt payments — from student loans, car loans and credit card debt that are only mounting.
“Supporting overall financial well-being with effective planning tools is critical to helping the next generation achieve lasting retirement security,” said Nicky Zhang, investment strategist at Vanguard and co-author of the study.
Baby boomers are not ready to fully retire
Baby boomers, even though they hold more than half of the country’s wealth, are not ready to give up the 9 to 5 shift and retire in comfort. While the richest 30% of boomers are generally on track, the rest may fall short.
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For example, the average boomer must replace about a third of their pre-retirement income with their own savings and employer pension savings, but will still face a shortfall of approximately $9,000—equivalent to a quarter of their expenses per year.
To deal with this, boomers may need to consider options such as tapping home equity, reducing expenses or working two more years, the study found.
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