A 2021 survey from TransAmerica says that the youngest generation of American adults is getting a jumpstart on retirement by saving a lot earlier than older generations. Financial experts will point out that this is in part due to the decline of pensions and the rise of defined contribution plans like 401(k)s, which allow employees to invest part of their paycheck into a tax-advantaged retirement account. In fact, Gen Z could be the first generation to save entirely for retirement through a defined contribution plan.
When Does Each Generation Start Saving for Retirement?
There are four major generations of Americans currently active in the workforce: Baby Boomers (born between 1946 and 1964), Generation X-ers (born between 1965 and 1980), Millennials (born between 1981 and 1996) and Generation Z-ers (born between 1997 and 2012).
While the younger generations are generally thought to have been handed a raw deal when it comes to the state of the economy — wages have remained stagnant but prices, especially of homes, continue to soar — all of these age groups have prioritized the need to save for retirement.
The TransAmerica survey shows that Generation Z-ers started saving for retirement at the median age of 19, while Millennials began at 25, Generation X-ers began at 30 and Baby Boomers started putting away money for retirement at almost twice the age of Gen Z — 35.
The effects of compound interest make it especially important to save early for retirement, so that your investments can build on each other. Saving early means that Gen Z could overcome the structural disadvantages that it faces in the current economy.
Where Else Do the Generations Differ?
Not only does each age group have a different starting age when it comes to saving for retirement, but each is also putting away money at different rates.
The oldest generations, which include Baby Boomers and Gen X workers, are saving roughly 10% of their annual salaries into 401(k)s or similar retirement plans. Whereas younger generations of Millennials and Gen Z are putting away retirement money at 15%.
One of the reasons that younger generations may be saving at a higher rate than older generations is that they have more concerns about living comfortably in retirement.
TransAmerica found that 34% of Baby Boomers plan to live solely off their Social Security payments in retirement, while 77% of Millennials aren’t sure Social Security will even exist when they reach retirement age.
While that fear may be overstated, the survey speaks to a gap in retirement confidence between older and younger generations. And part of this could be due to the fact that pensions have declined.
The Decline of Pensions and the Rise of Auto-Enrollment
One reason younger generations could be saving more and at a younger age is because traditional pensions, known as defined benefit plans, are much less common today than they were decades ago.
With a defined benefit plan, you get a monthly payment in retirement from your former employer based on how long your employment lasted and how much you earned as an employee. This means that older employees who received a pension did not have to save as much money on the side.
A report from the Congressional Research Service says that only 15% of all private-sector workers had access to defined benefit plans in 2020, while 64% had access to defined contribution plans like 401(k)s. For a comparison, the Employee Benefits Research Institute says that approximately three times as many workers in the private sector (46%) had access to defined benefit plans in 1980.
This shift in retirement plans could help explain why younger generations are saving earlier. New employees are increasingly being enrolled automatically into 401(k) company plans. This means that young workers could put away money into retirement as soon as they start their first jobs.
It’s also worth nothing that some plans also increase automatically the money that each employee saves per year, therefore raising the savings rate higher compared to that of older generations.
The kids are all right. For a variety of reasons, the youngest American are saving money for retirement earlier and at a higher rate than their parents and grandparents. Defined contribution plans like 401(k)s are enrolling many more employees as soon as they start their first jobs. This could make Gen Z the first generation to save entirely for retirement through a defined contribution plan.
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