The Millennial and Gen Z Guide to a Sweet Retirement

If you tell the average 22-year-old that the best time to start saving for retirement is yesterday, they may throw you an incredulous glance. “Are you kidding?” they may say, “I’m not due to retire for another forty years!”

The argument you may hear from Millennials and even some older members of Generation Z—those born between 1997 and 2012—is that they’re busy starting a family or paying down student loans, and they simply don’t have the money to worry about retirement.

Many young adults are, in fact, worried about having enough savings for their future. Just under half of millennials and Gen Z workers currently feel financially secure and about 40% are worried about their ability to retire comfortably.¹

However, having time on your side is a tremendous advantage. Participating in a retirement plan early in your career may be the single easiest way to retire with an impressive nest egg, and alleviate some of your financial anxiety about the future.

The magic of time

Here’s a hypothetical scenario that puts things into perspective:

Say 22-year-old Bob makes $60,000 a year and plans to retire at 65. He contributes 10% of his pre-tax salary into his 401(k) plan retirement account while his employer chips in 2% in matching contributions. Assuming he consistently makes that 12% monthly contribution of $600 to Bob’s 401(k) plan account and earns a hypothetical 5% rate of return on such plan investments, he’ll end up with $1,057,228 at retirement.

Sally, however, doesn’t start contributing to her 401(k) plan until she reaches age 45. Then, she contributes $1,000 per month at the same hypothetical rate of return as Bob]. By the age of 65 she will have $407,458 in her 401(k) plan retirement account—just 39% of what Bob has saved.

While many investors go in search of the magic double-digit stock gain, young investors shouldn’t overlook the power of consistent contributions to their retirement accounts—even if the contributions begin very small.

Hypothetical results for illustrative purposes only and are not representative of any particular investment.

Even small amounts make a big difference

A frequent complaint from young investors is that they simply don’t have the excess cash to contribute to their 401(k) plan account or other retirement savings vehicles. Using the example of Bob and Sally, let’s look at this misconception.

Say Bob complains that he can only afford to put away 4% of his paycheck each month due to his student loan payments and tight budget. Assuming the same rate of return for 401(k) plan investment over 43 years and a 2% employer matching contribution to Bob’s 401(k) plan account, he will have $528,614 at retirement—still significantly more than Sally even though his monthly and overall contributions were considerably less than hers.

Hypothetical results for illustrative purposes only and are not representative of any particular investment.

While that may not be enough for Bob to retire on, more than half of today’s 65-year-olds have assets worth $250,000 or less, making it likely they’ll run out of cash in their retirement accounts and must rely mainly on Social Security.²

Now, of course, investment returns on 401(k) plan investments aren’t usually as steady as our hypothetical example and rates of return typically will fluctuate over time. But with enough time on one’s side, even small contributions to a 401(k) plan or other qualified retirement account can make a big difference to an overall retirement portfolio.

One easy way to increase the amount you’re saving for retirement is to hike your workplace contributions by a percentage every time you get a raise. That way you won’t notice the added money going from your paycheck to your retirement account. 

Financial education that pays in the long run

Many young investors are also unaware about Modern Portfolio Theory, which looks at how an investor can build a portfolio to optimize expected returns for a given level of risk, or the importance of making consistent contributions to a 401(k) plan on a pre-tax basis. A Financial Advisor can also help explain asset allocation and investment diversification to help smooth long-term returns through bear and bull markets.

But first and foremost, young investors should consider the pre-tax nature of contributions made to a 401(k) plan and how to put the power of time to work for their retirement savings. Often, these contributions may be the most important investment they’ll make for their retirement.