Retirement is important for everyone, but it’s even more crucial for those in Generation Z. Why? Because the earlier you start saving, the more money you’ll have to enjoy in your golden years. As Gen Zs are starting to enter the job market, they should be thinking about retirement investing now rather than a decade down the road.
Good news – if you’re a part of Gen Z, you already have access to multiple different retirement tools and investing strategies. Leverage them properly, and they can set you up for success and a life of comfort after you retire.
Not sure where to start? Let’s break down five of the best retirement strategies you can and should look into sooner rather than later.
The Importance of Retirement Investing for Gen Z
It’s important for Gen Zers to invest for retirement for the same reason it’s crucial for everyone else: comfort. When you retire, you might receive a pension depending on the job you worked for most of your career. And you may also benefit from Social Security if you’ve collected enough credits. But neither of those payments are guaranteed.
Even if they were, they don’t always make up enough money to live comfortably after you retire. You need an additional source of income. For most individuals in Gen Z and earlier generations, that income comes from investments.
Indeed, investing in the stock market has been the primary vehicle for American prosperity post-retirement for decades. Throw some money into the stock market when you’re young, let it grow along with the economy, and reap the rewards as you relax post-retirement.
However, the education system does a poor job explaining retirement investing to those in Gen Z (and to adults of earlier generations). It’s not uncommon for young workers to enter the job market not knowing how to invest for retirement, why it’s crucial, or how to do so most efficiently. The same is true for many financial topics, like why it’s important to have car insurance or how credit works.
Let’s explain how Gen Zers can start thinking about retirement investing:
Max Your 401(k) Contributions
If you’re a member of Gen Z and have recently taken a job, look into potential 401(k) plans. A 401(k) is a standard retirement account that invests your money in relatively safe securities that grow along with the economy. When contributed to regularly, your 401(k) will result in excellent yields to withdraw from after you retire.
However, 401(k)s are popular for another reason: employer contributions. Many employers offer 401(k) plans where they match your 401(k) contributions each month up to a certain percentage. This percentage is typically 1% to 5%, with 3% being the most common.
That’s free money! If your employer offers a 401(k) plan, take advantage of it by automatically investing a small percentage of each paycheck. Your employer then matches that percentage, so your 401(k) grows at least twice as fast.
Regularly contributing to your 401(k) account is the number one strategy you can use as a Gen Z worker to build up your retirement savings quickly. Try to find companies offering 401(k) plans as recruitment strategies for new employees as you job hunt.
It’s arguably even more important to start saving for retirement early. In fact, the earlier you can start putting money aside, the more funds you’ll have to withdraw from come retirement. That’s especially true compared to someone who holds off investing when they are young and then contributes more with each paycheck for several years.
Thanks to the miracles of compound interest, investing even $100 a month from the age of 18 onward can make a massive difference in how much you have to withdraw after retirement. Saving early is more important than saving big, especially if you are young and don’t have lots of spare cash due to student loans or other costs.
Save as much and as often as you can, whether you can take advantage of a 401(k) matching plan with your employer or not.
Save with a Roth IRA
If you’re a young worker and your employer doesn’t have a 401(k) account, you can invest early via a Roth IRA. Roth individual retirement accounts are unlike standard pension accounts in that you have to pay taxes on your contributions.
But there’s an advantage: when you withdraw money from your Roth IRA post-retirement, you don’t have to pay any taxes on that money after you are 59 ½ years old. Like traditional IRAs, Roth IRAs allow you to contribute up to $6000 each year; and you can start contributing even before you are 18.
Therefore, Roth IRAs are perfect vehicles to start investing in ASAP as a Gen Z member. These investment accounts are ideal for flexible contributions and withdrawals and are a great means to save up for emergencies or retirement as early as possible.
Invest Aggressively Early, Then Shift Your Savings Strategy
Speaking of investing early, Gen Z investors should try to practice aggressive investment strategies in their early days. When you’re young and your investment account is small, setting up your investment portfolio for “aggressive growth” is wise to make big gains early.
As you get older, it’s wiser to shift your savings strategy to a more conservative one. This way, you won’t lose most of your investment money due to market downswings just when you need it.
Use Health Savings Accounts
Last but not least, Gen Z workers might consider leveraging health savings accounts for even more retirement gains. Health savings accounts are technically meant to help you build savings for sudden or unexpected medical expenses.
However, most of these accounts don’t have time or withdrawal limits for using the money. Because health savings plans are tax-advantaged, you can deduct your contributions to these accounts, saving money in the short term. You can also use these funds for eligible health expenses without paying taxes on withdrawals (though other withdrawals are subject to taxation).
Health savings accounts allow you to affordably pay for copayments, prescription drugs, health insurance deductibles, and lots of other health expenses you might encounter over your life. They’re great for building wealth, specifically for medical costs in the future.
Consider starting and investing in a health savings account simultaneously with a primary retirement investment account if you can manage it. This strategy might be better for Gen Z workers in a decade or so once they’ve built up enough wealth to afford another investment account.
It’s time for Gen Z workers to start thinking about retirement investing sooner rather than later. Fortunately, if you take the above five strategies to heart and follow just one or two of them, you’ll be in a much better place when it’s time to retire than those who don’t invest at all or who start investing too late.