How an Average Gen Zer Can Save $1.5 Million for Retirement

It seems like Americans of all ages feel behind on retirement savings. A recent survey from Northwestern Mutual found big gaps between how much Americans of every generation (from boomers to Gen Z) currently have saved for retirement and how much they think they'll need for a comfortable retirement.

According to Northwestern Mutual's survey, the average "magic number" that most Americans believe they need to retire is $1.46 million. But most Americans are nowhere close to millionaire status. Does saving almost $1.5 million feel overwhelming to you? If so, you're not alone.

Thankfully, you don't have to save that money all at once. Gen Zers (the youngest generation in the workforce) have literally decades of growth ahead -- in your career, your earning power, and in the compounding interest growth of your investments.

Let's look at how realistic it is for Gen Zers to save $1.5 million for retirement.

Average Gen Z retirement savings: $22,800 saved, 40 years left

The Northwestern Mutual 2024 Planning and Progress Study found that Gen Zers currently have an average of $22,800 of retirement savings and are the most optimistic group when asked about their future retirement prospects. In fact, 64% of Gen Zers surveyed said they think they will be "financially prepared for retirement when the time comes" -- more than any other generation.

Sometimes Gen Zers get depicted as being gloomy about their personal finances -- but they're correct to be optimistic about retirement planning. That's because being young is a retirement savings superpower! Let's crunch some numbers to see why, with a few assumptions to start.

• Gen Zers were born between 1997 and 2012. So let's say that a typical Gen Zer (who's already an adult, working full-time, and saving for retirement) is 27 years old in 2024.
• And let's say that this 27 year old has saved the Gen Z average amount for retirement so far, based on the Northwestern Mutual survey: $22,800.
• If you're 27 years old in 2024, your full Social Security retirement age is 67. So you have 40 more years to save and invest for retirement. That long time horizon means you have plenty of growth potential for your investments -- you can afford a higher risk tolerance. Every dollar you invest today is going to work hard for you for a long, long time.

How to invest for retirement: 40 years away

Having 40 years is a lifetime in investing, and even just getting started with retirement savings in your 20s is a massive advantage. You might not realize it now, but your future self will thank you for every dollar you put into your 401(k), IRA, or brokerage account today.

If you're still in your 20s, even if you have $0 saved for retirement, even if you have some credit card debt, don't feel bad. Don't feel like you're "falling behind." Your journey as an investor is just beginning, and you have all the time in the world.

Let's see how much our typical Gen Zer can save for retirement, based on socking away a few hundred dollars per month.

How much you'll have for retirement if you save $324 per month

Let's say that you have the Gen Z average of $22,800 saved for retirement, and you can save a total of $324 per month ($3,888 per year). You can do all of your retirement savings within your 401(k) plan at work, especially if you get an employer match. Or if you don't have a 401(k), you can put up to $7,000 into a Roth IRA or traditional IRA for 2024.

(Side note: Roth IRAs are often a better choice for Gen Z because while you don't get a tax deduction for the money you put in, the money can be withdrawn tax-free in retirement. People in their 20s are likely in the lowest tax bracket they'll ever be in. So for Gen Z, your future tax-free earnings from a Roth IRA are likely worth much more than a one-time tax break you'd get with a traditional IRA today.)

Since you have so much time for your investments to grow, you should probably invest in 100% stock ETFs or a target date retirement fund. Try not to worry about the stock market in the short term -- just leave your money alone and let it grow.

Stocks go up and down, but for the purposes of this retirement plan, we're assuming that your diversified stock portfolio could earn average annual returns of 8%. So after 40 years, when you reach age 67, you would have $1,502,531 saved for retirement. That's enough to generate about $60,101 of income per year in retirement (assuming 4% annual withdrawals from your investment portfolio, which is a common suggestion).

But what if you have no money saved for retirement and want a bigger nest egg? Gen Zers told Northwestern Mutual they needed an even bigger "magic number" to retire: $1.61 million. Let's see how you can get that, starting from nothing.

Starting with $0 at age 27: How to save $1.61 million for retirement

Let's assume you can get an 8% average annual return with a diversified portfolio of (mostly) stocks over the next 40 years before retirement.

Based on calculations from Investor.gov, if you save $518 per month for the next 40 years, you'll have $1.61 million at age 67.

Bottom line

Gen Zers shouldn't feel behind on retirement savings. You have your whole life ahead of you to work, save, and invest. The more years you have for your money to grow, the less you need to save per month.