Generation Z, get ready for pension fund poster shock | Smart Change: Personal Finance

(Kylie Hagen)

Generation Z – those born between 1997 and 2012 – are the newest workers on the scene, and despite the pandemic, inflation and everything else we’ve been through in the past few years, they remain optimistic about their future. The average estimated retirement age is 63.6, according to a recent survey by BlackRock. That’s nearly 2.5 years before when most of the baby-boom generation are planning to retire.

But when you dig below the surface, some red flags appear. And if left uncorrected, they could leave Generation Z in real trouble when it’s time to retire.

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Excessive optimism can be a problem in retirement planning

It’s impossible for anyone to predict exactly how much they will spend in retirement, which is why it’s always better to be too pessimistic about your expenses than to be too optimistic. If you save more than you need, you will have a little extra money to pass on to your heirs. If you save too little, you will have serious problems paying your bills.

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While people of any generation can make this mistake, it appears to be especially common among younger workers. About 36% of Gen Z survey respondents said they would need a nest egg of less than $250,000 to retire comfortably, according to BlackRock. The same survey found that baby boomers estimated they would need anywhere from $1 million to $3 million. So who is right?

Well, the answer can be both or it can’t be either. But let’s take a look at some averages. The typical household headed by an adult 65 or older spent about $47,579 in 2020, according to the Bureau of Labor Statistics. It is reasonable to assume that this number will now be higher due to inflation. Let’s say $50,000 a year, for simplicity’s sake.

At this rate, you’d burn $250,000 in about five years if you were paying all of your retirement expenses yourself. If you have Social Security or a part-time job to help you, you might be able to extend it a little, but it probably won’t last 20 or 30 years — but your retirement might.

A million-dollar nest egg has a better chance of surviving, but even that probably won’t provide an extravagant lifestyle. Inflation will continue to drive up costs and Social Security probably won’t cover as much in the future as it does today. So it’s always better to estimate a slightly higher value rather than an extremely low value when calculating your retirement needs.

Don’t wait to start saving for retirement

Underestimating your retirement needs can save you very little for your future now. The BlackRock survey found that 72% of Generation Z workers would save less for retirement if they faced other expensive goals. This may not seem like a problem when you still have contracts until retirement, but you can pay for it as you get older.

The retirement contributions you make when you’re younger are often among the most impactful. This money has four decades or more, in some cases, to remain invested. This can generate a lot of profits, which in turn reduces the amount you have to save to reach your target retirement goal.

But if you save very little or not at all right now, you will have to work even harder later in your career to make up for it. You can save $65 million by allocating only $403 per month starting at $25 if you earn a 7% average annual rate of return. But if you wait until 30 to start, now you have to save $582 per month to reach your goal. That’s an additional $75,180 out of your pocket over your career.

I know retirement can be a long way off when you’re young, but those years will slip faster than you might expect. You’ll be better prepared for the financial challenges you’ll face as a retiree if you take the time now to calculate a realistic retirement savings goal and build a consistent monthly savings habit. It may mean saying no to some of the things you want to do now, but it’s worth being able to enjoy a financially secure future.

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