Gen Z is off to a surprisingly good start with retirement savings, with median savings of around $29,000, according to Goldman Sachs. That money alone could be worth hundreds of thousands of dollars by the time they're ready to retire.
But savings aren't everything when it comes to retirement, and having a solid financial plan may be one area Gen Z is too overconfident. A recent Goldman Sachs survey provided insight into three key areas Zoomers may want to review to ensure they're on track for a comfortable future.
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Retirement age
Many Americans think of retirement age as being somewhere between 62 and 65, but a significant portion of Gen Z has set their sights on a much earlier departure from the workforce. Of the Gen Z workers surveyed, 44% said they hope to retire before age 60.
Some people do pull this off, but it's not easy. Retiring in your 50s or earlier could mean spending 40 or more years in retirement. You'll need a large nest egg to do that, and that means saving a large percentage of your income today.
Early retirees also have to navigate challenges like losing access to employer-sponsored health insurance but not yet having access to Medicare. They must also work around the early withdrawal penalties for taking money out of most retirement accounts before age 59 1/2.
This isn't to say Gen Z workers cannot pull off an early retirement, but it's important to take a hard look at the costs and challenges such a decision will bring. If you're wary about not being able to tackle these challenges, delaying retirement a little longer could be wise.
Required annual income relative to pre-retirement income
More than three in four Gen Z workers surveyed said they expect they'll need less than 70% of their pre-retirement income to cover their annual expenses in retirement. That makes Gen Z the most optimistic of the four generations captured in the survey, but it won't be enough for a lot of people.
The common rule of thumb says you'll need 80% of your pre-retirement income in retirement, and some may need more. If you plan to travel a lot, for example, you could spend even more in retirement than you did while you were working.
That said, rather than basing your savings goal on a set percentage of your pre-retirement income, think about how you envision your retirement. Estimate how much you believe your annual expenses will be and use this as your guide when determining how much to save for your future.
How much of your retirement costs you'll have to fund alone
Most workers (yes, even Gen Z) will be able to count on some Social Security benefits to cover their expenses. But the program was only designed to cover about 40% of pre-retirement income for average workers. Declining buying power and potential funding shortfalls could mean Gen Z gets even less.
Yet nearly half of all Gen Z workers Goldman Sachs surveyed said they expect to fund less than 40% of their retirement income on their own. This is unlikely unless you qualify for a pension, which few workers do.
It's dangerous to underestimate how much of your retirement expenses you'll need to cover on your own. Some may not realize they're off track until they're nearing their chosen retirement date or already past it. At that point, it's going to be challenging to make up the shortfall.
Instead, it's better to expect to fund at least 60% to 70% of your retirement costs on your own, with the remaining 30% to 40% covered by Social Security. Or even better, create a my Social Security account and use the benefit estimator tool there to help you determine how much you'll get from the program based on your work history to date. Use this estimate to figure out how much of your total monthly expenses Social Security will cover, so you know how much you'll have to fund independently.
Be prepared for change
Even after taking the above steps and building a retirement plan you're comfortable with, you'll have to do some revising. Changing jobs over the years might affect how much you can save for your future. Your retirement goals might change. The economy is going to have its ups and downs, which will affect how quickly your investments grow. Changes to Social Security might affect how much you get from the program.
There's no way to anticipate all of these factors right now, so the best thing to do is review your retirement plan annually. Make small changes as needed to keep you on track toward your goal.
