For Gen Z, retirement can feel like ages away, and planning for retirement isn’t usually a fun thing to do when you’re in your 20s. But early retirement is a financial investment Gen Z should make this year.
Matthew Grisham, Principal wealth adviser at Gebhardt Group Inc., has advice. He says, “Despite the temptation to ignore retirement until you get much older, starting as soon as you can fog a mirror and earn a paycheck makes a huge difference.”
However, doing the right thing financially is not always the easiest, and young people often have yet to fully understand the benefits of retiring early. But you can change all of that.
Eliza Arnod, co-founder of Arnie — a 401(k) service provider — says each dollar you save now could grow exponentially by the time you’re ready to retire. This not only lightens your financial burden in the later years but gives you the freedom to pursue your passions without worrying about money.
Financial Benefits of Planning For Retirement Early
Planning for early retirement offers you a gateway to financial freedom, as you can decide to spend your later years doing life without financial consequences.
Ben Skilling, SVP, director of financial planning at UMB Bank, says thinking about and planning for retirement sets you up for financial success in the future and the likelihood to retire sooner. The dedication to financial planning for your retirement early allows you to experience freedom and peace of mind in the golden years.
Eliza also reiterates that planning for retirement early is a golden opportunity to ensure a comfortable and secure future. Here are some more specific benefits that fit into that picture.
Power of Compound Interest
Megan Yost, SVP and engagement strategist at Segal Benz — a consulting firm — says retirement can feel irrelevant when it’s far away, especially when you’re juggling competing financial priorities as a Gen Zer. The earlier you start saving, the longer your money has the potential to make money on its own. This is the magic of compound interest which helps money grow exponentially over time.
Long-Term Investment Potential
Ben says Gen Z has the time and luxury to plan ahead. And by saving for retirement early on, they can contribute to an employer-sponsored 401(k) retirement plan, individual retirement account (IRA) or health savings account (HSA). This early start provides the opportunity to make more aggressive investment choices and gives those investments more time to grow and yield benefits from compound interest.
Eliza also adds that starting early allows you to take calculated risks with your investment, potentially leading to even greater returns. Remember, the earlier you start, the easier it is.
Increased Savings
Megan says, “Another benefit of starting early is that anything you save helps — and the longer you wait to start saving, the more you need to save [down the line]. Saving for retirement may feel less intimidating when you work at it gradually over time.”
According to data from Empower, Gen Z is saving less than the older generations, on average — currently just 5.9% of their income.
Steps Gen Z Can Take To Prepare For Retirement
The question isn’t really if Gen Z should prep for retirement — the earlier they do it, the better. But they may not be sure where to start. Here are some steps they can take to ease into the process.
Develop Financial Literacy
Empower highlights that only 62% of Gen Z are contributing enough to their retirement plans to maximize employers’ matching contributions. This gap represents a significant opportunity to educate Gen Z.
The most important preparation you can make toward early retirement as a Gen Zer is to develop financial literacy. You can do this through utilizing online resources or educational platforms and seeking guidance from financial advisors or mentors. This will enable you to personalize your pathway to retirement and ensure you meet your financial target.
Manage Student Loans and Debts
Sometimes, repayment of student loans can get in the way of preparing for retirement. However, the key is to manage the debt while preparing for retirement and the way this can be done is through contingency planning.
Build an Emergency Fund
Emergencies can’t always be avoided, so it’s best to be financially planning for them ahead of time, just in case. Having an emergency fund will also prevent you from using up your savings to fund emergencies and having little or nothing left for retirement.
Allocate Funds for Retirement
You need to set aside a percentage of your income for retirement. The percentage doesn’t matter as much as the consistency, since drops of water make an ocean. It is also essential to understand the different retirement options and vehicles so you can properly allocate funds. The percentage of funds you can allocate to retirement vehicles like a 401(k) and IRA will vary based on your needs, lifestyle and income level.
Nothing beats knowing the consistent savings in your youth can generate massive interest and offer you the opportunity to secure your future without breaking your back. The best time to set the future of your finances is now.