U.S. markets close in 5 hours 2 minutes
  • S&P 500

    +16.71 (+0.36%)
  • Dow 30

    +124.16 (+0.34%)
  • Nasdaq

    +63.36 (+0.44%)
  • Russell 2000

    +12.40 (+0.66%)
  • Crude Oil

    +2.04 (+2.94%)
  • Gold

    -21.30 (-1.04%)
  • Silver

    -0.33 (-1.37%)

    -0.0024 (-0.23%)
  • 10-Yr Bond

    +0.1080 (+2.62%)

    -0.0045 (-0.36%)

    +0.2800 (+0.19%)
  • Bitcoin USD

    +120.89 (+0.28%)
  • CMC Crypto 200

    +7.15 (+0.80%)
  • FTSE 100

    +51.33 (+0.68%)
  • Nikkei 225

    -550.45 (-1.68%)

Gen Z Is Confident They’ll Be Able To Afford Retirement — But Vastly Underestimate How Much It Costs

Eva-Katalin / Getty Images
Eva-Katalin / Getty Images

Gen Z exudes confidence, not just in their daily lives but also in their retirement savings. According to a recent GOBankingRates survey, 81% of Gen Zers aged 18 to 24 are confident they’ll amass enough savings for their retirement years. However, when questioned about the savings they’ll need for retirement, 78% believe they can retire comfortably with $1 million or less, with half of them considering $500,000 or less as sufficient.

Retirement Savings: 5 Expenses You Can Easily Cut, According to Experts
Learn: The Simple, Effective Way To Fortify Your Retirement Mix

This unbridled confidence, while admirable, may fall short in the face of the true costs of retirement, both today and decades from now when Gen Z eventually retires.

Here’s a closer look at why Gen Z’s retirement confidence may not align with the financial realities they will face and what a more accurate savings plan should entail for this generation.

81% of Gen Z Americans Believe They’ll Have Enough for Retirement

Gen Z stands out for their self-assuredness when it comes to retirement savings. A remarkable 81% of Americans aged 18 to 24, known as Gen Z, express profound confidence in their ability to amass sufficient funds for retirement. This contrasts with the broader American population, where 63% share similar optimism. Within the Gen Z demographic, half feel moderately confident, while an impressive 31% exude unwavering confidence regarding their retirement savings.

It’s noteworthy that Gen Z’s financial confidence is not uniform across other age groups. Within the 18 to 24 bracket, 31% harbor strong confidence, making them the most assured subgroup concerning their retirement savings. In contrast, only 29% of those aged 25 to 34 feel similarly confident, with this figure dwindling to 24% among those aged 35 to 44 and a mere 14% among the 45 to 54 age group.

Read More: 14 Key Signs You May Run Out of Money in Retirement

The Pitfall of Underestimation

Despite their confidence, Gen Z’s estimates of required retirement savings fall significantly short of the mark, which poses a financial risk. The survey findings unveil that 24% of Gen Zers aged 18 to 24 believe they can retire with less than $250,000. An additional 25% think they can manage with $250,001 to $500,000. Even among those who anticipate higher retirement costs, the majority underestimate the financial requirements.

Furthermore, a mere 8% of Gen Zers in the 18 to 24 age group believe that a retirement fund of $1.01 million to $1.5 million will suffice. Only 7% reckon that $1.51 to $2 million will be adequate, while a meager 3% deem $2.01 to $3 million necessary. The final 3% anticipate needing over $3 million.

Understanding the Escalating Costs of Retirement

While $1 million dollars may appear sufficient for a comfortable retirement at present, it is crucial to recognize the factors contributing to the rising costs of living. These factors include inflation, taxes and the duration of retirement, all of which significantly impact the amount Gen Z will require for a financially secure retirement.

The apparent overconfidence in their retirement finds may result from a failure to account for those evolving financial dynamics.

Embracing the 4% Rule

Experts recommend adopting the 4% rule, a strategy rooted in the observation that the cost of living has risen by approximately 4% annually since 1960.

“A rule of thumb [is] that you can safely withdraw 4% of your investment portfolio in the first year of retirement and adjust it for inflation in subsequent years without outliving your money,” said Kendall Meade, CFP, a financial planner at SoFi.

It’s important to note that this calculation does not factor in other sources of income, such as Social Security or pensions.

In practical terms, this means that in order to sustain a $50,000 annual expenditure during retirement, a savings of $1,250,000 will be necessary. Similarly, a $75,000 annual expense would require $1,875,000 in savings, and a $100,000 yearly expenditure would necessitate $2,500,000 in retirement savings.

Crafting a Personalized Retirement Plan

While the 4% rule is a valuable foundation, crafting a personalized retirement plan is equally vital. This custom plan should consider income sources, expenses that evolve over time, diverse account types, taxes, fees and unforeseen financial challenges, Meade said. “You should also account for health and lifestyle factors that may influence life expectancy.”

Setting a Savings Course Now

Commencing retirement planning early enables individuals to contribute more to their savings and leverage the power of compounding interest. However, understanding how to allocate these funds across various categories is crucial.

Categorizing Retirement Savings

The length of your retirement and your intended expenditures with essential categories play a pivotal role in determining the requisite retirement fund.

“Most of your money in retirement is spent on three major categories including housing, transportation and medical expenses,” said David Rosenstrock, CFP and founder at Wharton Wealth Planning. “According to a Bureau of Labor Statistics Survey, for adults age 65 and older, housing represents 34% [of spending], transportation is 16% of spending, and healthcare represents 13% of spending.”

Harnessing IRAs and Employer Plans

Accumulating funds for retirement efficiently involves leveraging individual retirement accounts (IRAs) and employer-sponsored retirement plans.

“The reason these plans are so important is that they combine the power of compounding with the benefit of tax-deferred — and in some cases, tax-free — growth,” Rosenstrock said. “For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis.”

Combatting Lifestyle Inflation

A frequently overlooked strategy when it comes to retirement goals is lifestyle inflation.

“This is when your expenses increase as your income grows,” Meade said. “A way to avoid that is by saving/investing most of any raises or bonuses you get. This serves two purposes — it prevents lifestyle inflation and keeps your expenses lower now, meaning you will need less money to replace your current lifestyle in retirement, and it allows you to save more money now, which can be invested and grow over time.”

Methodology: GOBankingRates surveyed 1,037 Americans aged 18 and older from across the country between Sept. 5 and Sept. 7, 2023, asking fifteen different questions: (1) How much money do you currently have saved for retirement?; (2) How much money do you think you’ll need in retirement?; (3) How much do you spend or expect to spend monthly during your retirement?; (4) If you aren’t yet retired, how much do you expect to get from Social Security during your retirement?; (5) How much of your retirement do you plan to fund with Social Security?; (6) At what age did you or do you plan to claim Social Security benefits?; (7) Did you or do you think you will have to move to afford your retirement?; (8) Which of the following proposed Social Security solutions do you think would work best to prevent the trust fund from being depleted?; (9) What sources of income will you have in retirement? (Select all that apply); (10) How confident are you that you will have saved enough to afford retirement?; (11) If you retired early, at what age did you retire?; (12) Are you counting on help from your family (financial, housing, long-term care, etc.) to afford retirement?; (13) Do you think retiring around age 65 is financially possible for most Americans?; (14) What worries you financially about retirement? (Select all that apply); and (15) If you got a stimulus check in the last two years, how much of the money did you save for retirement?. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

More From GOBankingRates

This article originally appeared on Gen Z Is Confident They’ll Be Able To Afford Retirement — But Vastly Underestimate How Much It Costs