Retirements the ultimate goal for most workers. After all, few of us want to deal with the Monday through Friday grind when we’re in our seventh or eighth decade on Earth! However, there are an increasing number of young workers wondering if it will even be possible for them to retire.
As much as I’d love to give an unconditionally optimistic answer, reality is likely far more nuanced. That’s not to say Gen Z is not going to be able to retire. Rather, retirement trends for Gen Z are likely to be quite different from those of older generations. To fully explain this, some historical context is needed.
The World War II generation, today more commonly known as the Greatest Generation, survived the Great Depression. That left lasting scars; even those with plenty of money constantly worry that it will disappear. I have clients with millions in savings who still clip coupons. Why? Because they fear another Great Depression could happen, and wasting money now will make survival harder if it does.
In other words, the Greatest Generation was very good at saving money. That is also true of their children, the Silent Generation. Raised on the principle of economic thriftiness in the midst of economic uncertainty, that generation trended toward prudence; unnecessary spending was looked at begrudgingly. Products which could be repaired instead of replaced were. Coupons were clipped. Savings were untouched outside of true need.
That all changed with the next generation, the Baby Boomers. Growing up amongst the intentional austerity of the previous two generations, many Boomers felt theurge to break free from what they perceived as the prison of their parents’ parsimony. That is not to say the Boomers were irresponsible with their personal finances; in large part, they were not. However, they were willing to spend more money to make life more comfortable for themselves. More problematic, they were among the first to navigate the world of retirement savings outside of pensions.
Boomers were told to sock money away in 401(k)s for retirement, so they did. They were told tax-deferred savings were ideal because taxes would be lower when they retired. That could be a problem for them; taxes right now are likely as favorable as anything we’ll see in our lifetimes. It is exceedingly likely they will increase after the Tax Cuts and Jobs Act sunsets in 2025. Tax increases for people relying on 401(k)s to fund their retirement mean they will have less money throughout that retirement.
However, Boomers had a distinct advantage subsequent generations will likely not: decades-long declining interest rates. From the early 1980s to 2020, interest rates went from a peak of 18.4% all the way down to 0.5% in2020. When interest rates drop, markets tend to get stimulated, and that’s exactly what happened. As I’ve pointed out in previous blogs, for over a decade, we enjoyed the greatest stock market run in history.
The combination of soaring markets and plunging interest rates benefited the Boomers in two primary ways. The first is obvious: They made a lot of money in the stock market. Their 401(k)s and IRAs were largely fat and healthy — a great situation to be in when contemplating retirement. At the same time, those declining interest rates meant they could save money while increasing the value of their real property investments.
I’ve been known to joke that Boomers have the nicest kitchens you’ll ever see because they were able to take out tens of thousands of dollars in home equity to remodel the house while still refinancing the loan for a lower monthly payment. Think about that for a moment: While today’s generations are wondering if they’ll ever be able to afford a house, the Boomers had the incredible fortune not only to buy that house, but also the economic conditions to reduce their expenditures while simultaneously making their home more valuable, all while the stock market’s bull run was pumping money into their retirement savings.
That stock market run is over, inflation is up and interest rates are on the rise. The wealth-building and retirement-saving picture appears to be considerably different for today’s generations than for previous ones. Is it any wonder that the overriding question of young workers today is whether Gen Z will be able to retire?
Unfortunately, that question often takes the form of a seemingly similar one: How much will Gen Z need to retire? That is impossible to answer in a blog like this because it’s a goals-based planning question. I’m speaking to a general audience, and how much should be saved for retirement is a question that requires individual evaluation of a person’s finances and desires.
Some people live simply. A cup of coffee and a good book are all they need to have an ideal day. Others view time spent not traveling to exotic locations as time wasted. Clearly, the former requires quite a bit less money than the latter. This is why, despite the myriad of articles proclaiming you need some specific dollar amount — often $1 million — to retire, a purely goals-based approach risks retirement failure. For some, $1 million will be much more than they’ll ever need. For others, starting retirement with $1 million would see them go broke in just a few years.
That’s why a second evaluation, called cash flow planning, is necessary for a proper evaluation of what you need to save for a successful retirement. Cash flow planning considers your retirement goals, how much those goals are likely to cost, inflationary impacts on your savings and much more in order to determine how much you need at the beginning of retirement to have the best chance of a successful one. It’s a process that’s best done by a financial professional with access to high-level cash flow modeling systems that are generally unavailable to individuals.
Through cash flow modeling you can determine a goals-based plan, at which point you should do everything you can to meet that goal. Saving needs to become obligatory. Financial planners often say “pay yourself first,” and that’s absolutely necessary. By sacrificing the pleasure of some unnecessary spending today, you can work toward a more stress-free and comfortable retirement tomorrow.
Once you’re in the habit of saving part of your income for retirement, the next question becomes where to save it. Simply stuffing it into a savings account won’t be good enough; interest rates frequently fail to keep up with inflation which means the money you put away today will be worth less when you withdraw it in retirement.
The first, most obvious, retirement savings vehicle is your company-sponsored401(k). Many companies match contributions up to a certain percentage; you should save at least enough in your company-sponsored 401(k) to get their match. Don’t turn down free money!
Remember that there is a time to be aggressive and a time to be conservative. Young workers just starting out are better served by being more aggressive. Your retirement date, also known as your time horizon, is so far in the future that you risk sacrificing significant amounts of return if you are overly conservative in your investment choices.
If you are 15 or so years away from retirement, it’s time to start thinking about dialing back that risk; you’ve gotten your returns, and you don’t want to sacrifice them should the market drop at an inopportune time. There is one important factor to note with investment approaches: Financial conservatism is different from political conservatism.
I’ve spoken with a surprising number of people who think that because they are politically conservative, they need to be conservative in their investment decisions. Regardless of your political leanings, investment decisions should be based on sound financial planning, not on whether or not the strategy and the political ideology are spelled the same!
In short, it is entirely within reach for Gen Z to retire, but it’s important for members of that generation to understand that the retirement savings strategies which worked for older generations are likely to need considerable adjustment. Whatever your generation, working with a financial advisor like the ones at Asset Preservation Wealth & Tax can help you determine a plan to work toward the retirement of your dreams.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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