A surprising number of Gen Zers between 18 and 29 have hit the brakes on retirement savings in the past six months.
More than 6 in 10 of the oldest Gen Zers say they have stopped or reduced their retirement savings, compared with 46% of Gen X and 36% of boomers, according to a new study from Allianz Life Insurance Company of North America.
Two-thirds of these Gen Z folks added that they haven’t been able to contribute to savings as much as they’d like because of other demands for their cash.
“Gen Z may feel like they can afford to cut back on retirement savings now — they have decades until they will likely stop working,” Kelly LaVigne, vice president of Consumer Insights at Allianz Life, told Yahoo Finance.
That’s troubling for a variety of reasons, but the biggest is the toll it will take on their future retirement stockpile.
Read more: How to catch up on retirement savings
These choices, difficult as they are, will have repercussions later on.
“By reducing retirement expenses, they are stealing from their future selves,” LaVigne said. “Time in the market is crucial when saving for long-term financial goals like retirement. Without that time in the market on your side, Gen Zers who pull back on retirement savings now will need to save a greater dollar amount later on.”
Here’s how the math works out: With a base assumption of 5% return and $300 per month savings, if you begin at age 25, you will contribute a total of $144,000 and have $460,000 at age 65.
If you begin at age 35, you will contribute a total of $108,000 and have $251,000 at age 65. If you begin at age 45 and double your monthly contribution to $600, you will have $359,000 at age 65.
Read more: How much should I contribute to my 401(k)?
“It’s the time value of money,” Tricia Rosen, a financial planner and founder of Access Financial Planning, told Yahoo Finance. “The numbers illustrate that a small amount now, even with a conservative return assumption, will be very impactful at age 65.
“Time value of money is so powerful that even doubling the contribution halfway to age 65 still can’t make up the lost ground from not starting at age 25.”
I can empathize with these 20-somethings. It’s hard to envision a time 40 years down the runway to retirement when these small amounts will make a difference.
“Younger generations have a lot to contend with,” Fiona Greig, Vanguard’s global head of investor research and policy, wrote in a recent report. “Rising debt, inflation, and health care and housing costs have put pressure on these generations’ capacity to save.”
If you’re getting by on an entry-level salary, plus grappling with student loan and credit card debt, it’s a squeeze. You feel the pressing need for that money right now.
Last year, for example, Gen Z consumers, most of whom are in their 20s, carried an average credit card balance of $3,493, according to Experian data.
Read more: Best ways to pay off credit card debt
“When someone in this age range doesn’t have a lot of cushion in their monthly cash flow and they get either a little bit behind, or salary increases are not keeping up with the cost of living, it’s easy to see how this happens,” J. Victor Conrad, a certified financial planner and founder of Pinnacle Financial Strategies, in Wexford, Pa., told Yahoo Finance.
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Even though inflation has eased, cost-of-living increases over the past five years reduce how much people have for other needs, including saving for retirement, Christine Benz, Morningstar’s director of personal finance and retirement planning, told Yahoo Finance
“Because younger age cohorts have lower salaries and are less likely to own their homes than older adults, they’re more vulnerable to inflationary pressures and more likely to need to pull back on savings when costs go up,” Benz said.
“It’s a worrisome trend,” she added. “The youngest age groups are the least likely to have pensions, so they’ll be more reliant on their portfolios, not less, than older retirement savers.”
Her advice: For people feeling the pinch of tighter budgets, the old admonition to “pay yourself first” makes good sense, she said. “That means making automatic contributions wherever you can — to your company retirement plan, an IRA, and/or a taxable brokerage account.”
She also recommends, and I do too, to set the ‘auto-escalate’ feature that many 401(k) plans offer, so your contributions bump up on a preset basis every year until you hit the maximum allowable contribution rate.
“The ratcheting up of your contributions may not be entirely painless, but I’d guess that most people might not even feel the small increases that occur over time,” Benz said.
Conrad sets it up this way for his clients — regardless of their age — who are pressed with making hard money choices: “I encourage them to see that oftentimes financial decisions don’t need to be binary — do A or do B. But (they) can do some towards A and some towards B.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky and X.
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