7 reasons why Gen Z should start saving for retirement now
Between keeping up with the latest TikTok trends and Outer Banks episodes, starting your retirement fund might be one of the last things on your mind, especially if you’re in your late teens or early 20s.
But we’re here to tell you that the time to start saving for retirement is now! So listen up, Gen Z! Below are seven reasons why you should start saving for retirement now.
Growth, baby! Or, Compound growth, to be more specific.
Two words. Compound growth. Once you put money into your retirement fund it will grow exponentially. No extra work needed!
So the amount you are putting aside into your retirement fund from your entry-level job may not seem like a lot at first but, over time, you could end up with thousands of dollars worth of interest.
Here’s an example:
Let’s say you have an annual income of $70,000. Then you invest 15% in a fund that provides you with a 7% return rate. Well, if you start saving at age 30, at age 67 you will have about $167K in savings. Whereas if you start saving at 20, at age 67 you will have about $330K in savings. That’s nearly double the savings!
For those over 50 who need to accumulate funds in their 401k fast, some plans allow individuals to make up a catch-up contribution of up to $6,500 (as of 2021). These contributions are in addition to the annual 401k contribution limit. So instead of having a max annual contribution of $19,500, with the catch-up contribution, you will have a total annual contribution of $26,000. (These catch-up contributions payments are also an option for some individual retirement plans; contributions vary, and change each year, so double-check!)
But if you start saving for retirement at a younger age, then you will not have to play catch-up when you're older to have sufficient retirement funds. This means you can avoid having large amounts withheld from your paycheck when you’re older, and in return, have a more relaxed budget.
Investing early means more money! Opening a retirement account and starting to accumulate compound interest in your 20s could result in thousands—even millions— more dollars in your account. And this extra money can allow you to have more flexibility in your retirement plans. So if you dream of spending your retirement in Hawaii... who’s stopping you?!
If your employer offers a 401k or 403b, a percentage of your paycheck may be automatically added to your retirement account. In that case, your taxable wages would be reduced by the amount of the contributions to a 401k or 403b plan, if you chose to participate in them.
Now, yes, when you take out your money upon retirement you will then have to pay the taxes on the distributions from those retirement accounts. (Note: details depend on if they are ROTH or traditional 401ks). But the hope is that you will be in a lower tax bracket at that point so you should see tax savings.
Don’t have an employer-sponsored retirement plan? Well, don’t worry because you have options. An IRA account or individual 401k can still give you tax benefits.
When it comes to finances, nothing is guaranteed. But, by saving early and staying financially responsible there is the possibility that you could retire early if you wanted to do so.
Fewer financial responsibilities
In their 20s and 30s, people often have fewer financial obligations like a child’s 529 plan or mortgage payments. With a greater disposable income when you’re younger, placing a percentage of your salary in your retirement fund will be less of a hassle.
Social security isn't the answer
For those 62 or older, the average monthly social security benefit is around $1,500 (as of 2021). Generally speaking, the longer you wait to file for your benefits, the larger your monthly benefit may be.
Now, depending on where you live, this benefit may not be enough money to cover your monthly expenses. But even then, in 2034, the Social Security OASI Trust Fund for retirement benefits is estimated to be depleted. This does not mean that no one will receive retirement benefits. However, it does mean that the fund is expected to see a 24% decrease—and therefore fewer benefits for you. Boo! With these factors in mind, be proactive and start saving early, so you don’t have to rely so heavily on social security benefits. Think of these benefits as a supplement to your retirement fund.
Tips for those who want to start saving young
Weigh in the financial benefits of prospective employers
Target a job that is going to help you achieve and maintain financial wellness. So before accepting any job offer, be sure to analyze the company’s financial benefits like 401k (or 403b), health insurance, financial wellness support, physical wellness support, etc.
Invest enough to maximize the company match
Do you already have a job with an employer-sponsored retirement plan? Awesome!
Many of these plans feature an employer match. This means that your employer will match your investment (or at least part of it) up to a certain percentage. This money is already earmarked as part of your compensation package—so, take it! If you don’t invest up to that matching percentage, you’re leaving free money on the table!
Have an old 401(k) account? There are a few ways to deal with this situation. You may leave it where it is with your old employer, roll it into your new employer's 401(k) or roll it into a rollover IRA. Don't be tempted to cash it out, which could result in penalties and tax payments.
By investing for your retirement early you can help make life for your future self easier. These payments don’t have to be big. Even small deposits can have a huge impact—remember compound interest?! With this head start, later in life, you’ll be able to rest easy, knowing you have enough saved up. And, not to mention, you could invest in other options like the market, your child’s college fund, home renovations, and more.
Next up? Hit up that To-Do list and make sure you’re keeping the Ts crossed and Is dotted in your financial plan!