Generation Z spent years in the shadow of millennials, but they’re starting to come into their own now. They currently span ages 9 to 24, and the older half is starting to enter the workforce — with their first real jobs after graduation, or part-time and summer jobs while they’re still in school. As soon as they start working at any level, they have access to some valuable opportunities to save for the future. And time is on their side. If they start by setting aside some money when they’re young, their savings can grow significantly by the time they retire.
Many young workers are already making saving a priority. Principal Financial Group recently examined attitudes around financial New Year’s resolutions, and Gen Z leads in 2022 ambition for saving more and spending less — 70% plan to save more money in a savings account, and 55% plan to spend less money.It may seem difficult to find money to save when you’re just starting out, but making the most of tax-advantaged savings opportunities and long-term investments can make it so much easier to grow your money for the future. Here’s what Gen Z workers need to know about saving for retirement.
1. Start Saving Now, Even Just a Little Bit
When you’re earning your first paychecks, it can be difficult to set aside some of that money for such a distant goal. But figuring out ways to fit some saving into your budget can make a big difference in your financial future.
“The easiest advice to save for retirement is to start small and think big,” said Amelia O’Rourke-Owens, co-director of America Saves. “There’s no amount that’s too small to contribute to retirement now, and with compound interest you’ll be thanking yourself 20 years from now.”
Managing your budget can help you find some money to save, even when you’re just getting started. “Start by covering your living expenses, paying off debt, building an emergency fund and cutting out unnecessary expenses,” said Kevin Driscoll, vice president of advisory services for Navy Federal Financial Group. “From there, compare your income to your monthly expenses to know how much you can save each month for retirement or other financial goals. Fortunately, investing doesn’t require large amounts of money. Anything you can contribute today, no matter the amount, will make a difference long-term.”
Having the extra time for your money to grow is a major advantage. “Find a little bit here and there to save,” said Sri Reddy, senior vice president, retirement and income solutions, Principal Financial Group. “Gen Z has the long-term horizon advantage to scoop up returns in the market, so even just a few bucks pays off via compound interest.”
A few ways to find some extra money in your budget: “Check those auto subscriptions to be sure you’re only paying for what you’re using, and reallocate funds from any cancellations,” said Reddy. Also, if you get a raise or bonus, add some of that money into retirement savings right away. “It’s hard to miss money you never saw,” he said.
2. Save Automatically — and Get Free Money — With a 401(k)
When you do get a full-time job, saving some money in a 401(k) should be one of your top priorities. It’s an easy way to start saving because the money is automatically invested from your paychecks before you have an opportunity to spend it on anything else.
“Taking advantage of your employer’s retirement plan is one of the best and most simple ways to begin saving for retirement,” said Driscoll. You can contribute up to $20,500 to a 401(k) in 2022, but even small amounts can make a big difference over the long run. If your employer matches your contributions, try to invest at least enough to get the full employer match – that’s free money. Employers typically match up to 4% of pay, either dollar-for-dollar or 50 cents for every dollar you contribute.
“The first and most important question with employer-based retirement plans is — do you get an employer match?” said O’Rourke-Owens. “If yes, what are the requirements you must meet to maximize that match? Then your decision should be guided by how you can maximize any retirement match available from an employer. That’s an employee benefit and basically free money, so you don’t want to ever leave that on the table.”
3. Choose Between the Tax Advantages of a Roth 401(k) vs. Traditional 401(k)
Your employer may give you the choice of two types of 401(k) contributions: traditional or Roth. With a traditional 401(k), your contributions lower your taxable income now, grow tax deferred, and then the money is taxed when withdrawn. With Roth 401(k) contributions, you don’t get a tax break now but you can withdraw the money tax-free in retirement.
If you’re in a low tax bracket now — as so many people are when they’re starting out — you could come out ahead by foregoing the current tax break so you can withdraw the money tax-free in the future, when your tax bracket may be higher. However, if you’re having a tough time stretching your budget, getting the tax break now could help you be able to contribute more money. “If you can afford to save the maximum amount of $20,500, you may consider a Roth 401(k) to avoid future tax implications,” said Reddy. “If you can’t afford that option, you may be better in a pre-tax [traditional] plan, lessening the impact on your current paycheck.”
4. Build Tax-Free Savings With a Roth IRA at Any Age
You don’t need to be working full-time to start saving for retirement. People of all ages who earn some income from working — even teenagers with part-time or summer jobs — can contribute to a Roth IRA. There’s no minimum age requirement; you just need to have earned some money from working. You can contribute up to the amount of money you earned from your job for the year, with a maximum of $6,000 in 2021 and 2022.
You don’t get a tax break for your contributions, but you can withdraw the earnings tax-free after age 59 ½. And Roth IRAs are flexible: You can withdraw your contributions at any time without penalties or taxes. It’s a great way to start saving without having to worry about tying up all of the money if you need it in an emergency.
If you earned a few thousand dollars from working this year, you might not be interested in setting aside all of your earnings for the future. But your parents, grandparents or others can give you some money to contribute, as long as you don’t invest more than you earned from working. If you earned $2,000 in your summer job, for example, you can contribute up to $2,000 for the year.
You can open a Roth IRA with a brokerage firm, mutual fund company or bank. Minors can contribute to a custodial Roth IRA — their parents just need to sign extra forms, and they’ll take complete control of the account when they reach the age of majority.
You can also contribute to a Roth IRA even if you have a 401(k), too. You just need to earn less than the maximum Roth IRA income limits for the year – which is $144,000 for single workers in 2022, and $214,000 for married couples filing jointly. You can even sign up for automatic investments, so the money is contributed directly from your paychecks or bank accounts, similar to a 401(k).
5. Save For the Future in a Health Savings Account
A health savings account can be one of the most valuable retirement-savings tools. That sounds strange, since it was created to help build savings for out-of-pocket medical expenses. But there’s no time limit for using the money, and you can let it grow for the future in this tax-advantaged account. You’ll get a triple tax break: Your contributions are tax-deductible (or pre-tax if through your employer), the money grows tax-deferred and then can be used tax-free for eligible expenses at any time.
You can use the money to pay your health insurance deductibles, copayments, prescription drugs, over-the-counter medications, certain drugstore items, vision and dental care, eyeglasses, prescription sunglasses and many other expenses. There’s no use-it-or-lose-it rule: You can keep building up the savings for the future. If you use it for non-medical expenses, you’ll have to pay taxes and a 20% penalty. But that penalty disappears at age 65, when there are even more ways to use the money tax-free — in addition to other medical expenses, after you turn 65 you can also use the money tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage plans (you can’t make new HSA contributions after you enroll in Medicare, but you can still use money you already accumulated in the account).
To qualify to make HSA contributions in 2022 you must have a health insurance policy with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. As long as you have an HSA-eligible health insurance policy — whether through an employer or on your own — you can contribute up to $3,650 to the HSA for 2022 if you have self-only coverage, or $7,300 for family coverage. If you have a high-deductible policy at work, your employer may contribute money to your account — many employers add $500 or more to HSAs for employees who choose a high-deductible health insurance policy.
6. Match Your Investments to Your Long-Term Plan
No matter which type of retirement-savings accounts you choose, be sure to invest the money with the long-term time horizon in mind. Since you don’t need to withdraw the money for 30 years or more, you have time to ride the stock market’s ups and downs for the opportunity to have greater growth over the long run.
“Individuals who have decades until they need the money can invest more aggressively, with more money in stocks,” said Driscoll. “Your exact allocation will depend on your goals and your risk tolerance, but always remember to diversify your portfolio across a variety of assets.” For example, you can invest some money in mutual funds that focus on large companies, some on small companies and some on international firms.
You don’t need to make all of those decisions yourself. Most 401(k)s and IRAs offer target-date funds that make it easy to maintain a diversified portfolio that matches your timeframe. You choose a fund based on your target retirement date — such as a 2060 fund — and the fund starts out invested more aggressively in stock funds and gradually becomes more conservative, switching more money to bond funds and cash, as your retirement date gets closer.
“When you’re younger, you can absorb more risk in your retirement savings, and target retirement funds allow for that,” said O’Rourke-Owens. “As you get closer to retirement age, the asset mix changes to minimize investment risk.”
Saving for the future doesn’t need to be complicated. You can save automatically in a 401(k) or IRA, invest in a target-date fund based on your retirement time horizon and let the money grow for the future. “There is no denying that investing early can be a key component in a financially secure retirement,” said Driscoll. “Anyone just beginning their savings journey should keep their investments simple, contribute money consistently and monitor long-term returns. The overall returns on stock market investments are realized over time, not on a daily basis.”
