With the right strategy, young adults can create a financially healthy retirement plan.
Adventures and relaxation, spending time with friends and relatives and an overall sense of financial freedom is a pipe dream for many of today’s younger workers.
According to a survey conducted by Georgetown University in partnership with Bank of America, young adults are not just struggling with their day-to-day finances, but say they aren’t optimistic about their retirement. Only 28% who expect to retire after age 65 plan to fully stop working.
Here’s why people in this demographic aren't sure about their economic future and what they can do about it now.
Making the right savings and investment decisions can be daunting when people don’t feel confident about their knowledge base.
“I feel like there isn't a lot of education available in your college years and twenties that sets you up well for retirement,” says Alyssa Benson, a senior media strategist from Boone, North Carolina."There are so many options to be mindful of while also still being able to make ends meet in the here and now.”
The stress of being unsure about the process while trying to save money when bills are pressing, and worrying about not having accumulated enough for the future, can be overwhelming.
"For example, if I am putting 15% of my paycheck into my 401(k), I am losing $600 to $800 per month that I am now unable to live off of,” Benson says. “But if I don't contribute a substantial percentage to my 401(k), there is that fear that I will have to work until I am 70-plus to make ends meet.”
Setting cash aside early for retirement is recommended, but high debt can be a significant roadblock. A 2023 Credit Karma report found that the average credit card debt for Gen Z'ers was $3,328 for April-June 2023. And that’s a minor sum compared to student loans. In August 2023, the Education Data Initiative reported that 30-year-olds have an average outstanding student loan obligation of $42,822.
With a portion of their incomes dedicated to financing goods and services, hard choices must be made. The Georgetown University study found that of the 44% of young adults who have outstanding student loans and consumer debt, nearly half are opting for debt repayment over retirement savings.
According to Richard Barrington, a Rochester, New York-based financial analyst for Credit Sesame, prioritizing consumer debt when interest rates are high makes sense. It doesn’t have to be an all-or-nothing approach, though, especially when an employer is matching retirement plan contributions.
“Make the minimum payment on every debt,” Barrington says. "If you don’t do that, it will all get worse. But if your company matches – such as 50% of the first 6% of your salary you contribute – it's a good idea to take full advantage of the free money from your employer. Once you reach the upper limit of the matching funds, use the rest to pay down your credit card debt,” he adds.
In fact, when job hunting Barrington suggests specifically looking for a company that offers the retirement plan matching benefit. “Make it a decision factor in your search,” he says. “The higher salary isn’t necessarily the best offer if the other company has a contribution matching plan.”
To manage student loan debt as you pay down costly consumer debt and save for retirement, Barrington recommends considering the new federal loan income driven plans, which are more generous than past iterations. Payments are calculated as a percentage of discretionary income, so borrowers may have more available cash to set aside for retirement.
Another reason young adults doubt their ability to amass enough for the future is that they have felt the effect of rapidly rising costs, Barrington says.
“Today’s young people may be particularly sensitive about money because they were just burned by a sudden surge of inflation,” he says. “That negatively impacted personal savings rates at the beginning of 2022, and those rates have stayed low.”
Therefore, even without debt, the impact of rising costs is a worry. For example, Benson has already paid off her student loans, but inflation has taken a toll on her overall sense of financial security, she says. “I do have a mortgage rather than renting and the cost of living has certainly increased since I was paying off those loans four to five years ago.”
Still, inflation should be the impetus to save for retirement as soon as possible, not delay it. Barrington explains that at a 6% average annual rate of return, one dollar invested at the age of 25 would be worth approximately nine times as much as a dollar invested at age 65. “I think that's a powerful reason to start saving for retirement early,” he says.
Not having enough money to live through retirement is a genuine cause for concern, says Doug Carey, a chartered financial analyst and president of financial-planning software company WealthTrace in Zionsville, Indiana.
“Life expectancies are going up for many people, health care costs are increasing, Social Security is projected to be short of money in 10 years, and the stock market is overvalued by many measures,” he says. While frightening, swift action can offset such troubles.
Step one is to create a streamlined budget, which will reduce waste and increase available cash for saving.
“There are many good budgeting apps available now and I highly recommend that most people use one,” Carey says.
"Once people see exactly where their money is being spent it is so much easier to find ways to cut back on spending. For example, I recently had a client who broke out her spending by category in a budgeting program and was shocked to see how much she was spending on various iPhone apps. They were all auto-renewing and she didn’t even realize it. She canceled over half of them,” he adds.
Then commit to the saving-for-retirement process. If your company doesn’t offer an employer sponsored plan, such as a 401(k), open an individual retirement account and start contributing.
“By saving early and consistently with each paycheck, the power of compounding can work wonders for younger people,” Carey says. “When people start saving before age 40 they have 20 to 30 years of compounded returns. Saving to a tax-deferred retirement account over these years is by far the best way to retire stress-free.”
Regarding investment decisions, Carey stresses that this is also the best timeto take on risk. “Those in their 20s who are saving to a retirement plan should have nearly 100% in stocks in their retirement portfolios,” he says.
"They won’t use this money for decades, which means they have plenty of time to reap the rewards of higher stock returns. Over a long enough time period stocks always beat bonds and cash,” he adds.
A 2023 National Council Council on Aging report found that 45% of people aged 60 and older had household incomes below what they needed to afford basic living needs. Longer lives combined with inadequate savings, rising inflation and expensive healthcare costs are resulting in a national retirement security crisis. As such, many young adults may be facing the prospect of helping their parents financially.
“Americans have under-saved for retirement for years,” Barrington says, explaining that with time on your side you can do better.
Start saving early, regularly and assertively. If that means using the older generation as a model of what not to do, so be it. With the right strategy, you can weather uncontrollable conditions and be ready to enjoy the years when you are no longer working.