Gen Z and Millennials Are Ill-Prepared for Retirement, Here's How They Can Build up Savings

Prioritizing retirement savings is a wise decision in the post-pandemic world of job uncertainty, wage growth slump, elevated inflation and living costs alongside the high cost of borrowing.

What's more concerning is that the Social Security benefits could drop in 2033 as fewer employees are left to contribute (via payroll taxes) to the workforce's future retirement benefits. The situation is likely to impact millennials and Genz the most. As Baby Boomers continue to retire at a record pace, the Old-Age and Survivors Insurance (OASI) Trust Fund will deplete to a point within a decade where it can only cover 79% of scheduled retirement benefits, according to the Social Security and Medicare Boards of Trustees 2024 report.

An ageing population and trends like living longer and having fewer children are leading to a situation where older people will outnumber children in the US by 2034. Apart from the OASI fund, the report predicted that the Hospital Insurance (HI) Trust Fund, which pays for Medicare Part A, will be depleted in 2036 when payroll taxes cover only 89% of scheduled benefits.

In April, 72.22 million beneficiaries received payouts under Social Security schemes, according to the Social Security Administration. Meanwhile, the latest Alliance For Lifetime Income research showed Americans are relying heavily on Social Security benefits as 50% between ages 61 and 65 have already retired and are claiming them. Surprisingly, 40% of them need the income for monthly expenses.

Furthermore, around 28% support their adult-age children and extended family members, which may reflect the erratic job market and reduced ability of the youth to save due to existing debts and higher rents.

There's also a mismatch between how much GenZ and millennials feel they should save for retirement vs. how much they have. The gap is alarming. Certified financial planner Thomas Brock says the amount depends on the person's age and income.

According to him, those aged between 20 and 30 expect to save one to two times their annual salaries. The figure becomes three to four times the annual salary for those between 30 and 40 years old. Those between 40 and 50 expect to save around five to seven times their annual pay.

Considering the median weekly pay of $1,139 or $59,228 annually, workers should have saved between $60,000-$120,000 by age 30, $180,000-$240,000 by age 40, and $300,000-$420,000 by age 50.

However, a recent GOBankingRates survey of 1,005 US adults revealed that 28.09% of those between 18 and 24 have $0 in savings. It was the same for 30.17% of ages between 25 and 34 and 34.88% for those up to the age of 44 years.

Given the high debt millennials and GenZ carry, most must work on freeing up their monthly budget before contributing to retirement savings.

Check If You Qualify For Student Loan Forgiveness Programs

In Q1 2024, student loan balances stood at $1.6 trillion; last year's average student loan per borrower was $38,787.

Despite facing pushback from the Supreme Court, the Biden Administration continues to roll out measures to forgive student loans. Under President Joe Biden, the US Department of Education has forgiven around $167 billion in federal student loans for over 4.75 million borrowers. On May 21, the department announced $7.7 billion in further relief to 160,500 borrowers under the Public Service Loan Forgiveness (PSLF) Plan, Saving on a Valuable Education (SAVE) Plan, and those who faced the misuse of forbearance by loan servicers.

Many have been unable to tap into student debt relief programs because they are simply unaware of the terms and criteria. In 2022, the Consumer Financial Protection Bureau (CFPB) cracked down on loan servicers misleading borrowers about eligibility and benefits of the PSLF program, which led many to miss out on reliefs.

The same organization estimated a decade ago that 25% of the US workforce may be eligible for income-driven plans for public service workers. The PSLF program enables certain not-for-profit and government employees to have their federal student debts waived after ten years of on-time payments.

The newly introduced SAVE plan eliminates minimum payments. It lowers borrowers' monthly discretionary income that must be paid towards student debt to 5% to render some people with a $0 monthly bill eventually. Around 4.6 million are paying $0 in monthly student debt repayments under this plan.

New proposals are expected to impact over 30 million people positively. It also plans to auto-discharge debt for borrowers not enrolled but eligible for the SAVE plan and forgive debt for borrowers repaying for two decades or more.

Meanwhile, several improvements to income-driven plans that offer relief to borrowers on technicalities and criteria have benefitted almost a million people. Remember that if you plan to refinance federal student debt, you might become ineligible for federal loan forgiveness programs. The website studentaid.gov can help check eligibility and requirements of the different income-driven student debt forgiveness plans.

One In Three Are Maxing Out Credit Cards Limits

In Q1 2024, US credit card balances have increased 13.1% year-over-year to $1.12 trillion. A rising number of balances transitioned into delinquencies, especially those who have maxed out their credit cards or have a high credit utilization.

A Debt.com survey revealed that 45% of Americans cited high inflation and rising prices of essentials as the primary reasons they have depended on credit cards. Over 35% admitted to maxing out their credit limits in recent years, which supports a finding that over 75% are living paycheck-to-paycheck.

Survey after survey shows that millennials, especially GenZ, trust rewards and points more than credit issuers and get into debt faster due to high engagement with social media. Another 2023 Bankrate survey showed that 48% of social media users engaged in impulse buying, spending an average of $754 the previous year.

One may overcome these issues with discipline and awareness. However, people in the credit card debt trap can try the famous Avalanche or Snowball debt repayment methods for real impact.

Suppose you want to start saving money on high-interest payments from day one. In that case, the Avalanche repayment method tells you to make the maximum repayments towards the highest-interest credit card while making monthly minimum payments for the rest.

Those who find motivation in clearing the number of debt accounts can find the Snowball repayment method helpful. It involves making the highest payments to pay off the smallest debt balance first. When you clear the smallest debt, take the money you were putting in for that payment and use it to repay the next smallest debt.

The CFPB is also pushing a rule to cap late credit card fees at $8, which averages north of $30. The rule would save American families $10 billion annually. However, in a recent setback, it was blocked by Judge Mark Pittman of the US District Court for the Northern District of Texas after fierce backlash from Wall Street. Credit card issuers earn almost $9 billion annually from late fee charges. Analysts said the legal tussle will likely continue and escalate to the Supreme Court.

Bump Your 401(k) and IRA Contributions

A 2023 CNBC Your Money Survey of 2,700 full-time or part-time respondents found that 41% make zero contributions to 401(k) or employer-sponsored plans.

401(k)s and individual retirement accounts (IRA) are the most effective ways to grow your retirement wealth as they offer tax advantages, a chance to grow with the economy, and allow penalty-free withdrawals starting at 59 and a half years of age.

You also have the option of how you want to deal with taxes on capital gains. A traditional 401(k) will invest your monthly pretax contributions from your paychecks in stocks, bonds, or target-date funds to grow your pretax money tax-free. You only pay taxes on your withdrawals. Meanwhile, a Roth 401(k) grows your wealth using your after-tax contributions and withdrawals in retirement are tax-free.

The coolest feature is employer-matching contributions in 401(k)s where an employer matches or contributes, for instance, $0.5 for every $1 of employee contributions, up to, let's say, 6% of annual pay. The employer contribution is free money you want to use fully.

"The most important thing to know when deciding about your 401(k) is to use it. In a perfect world, you put the maximum amount in it. Still, at a minimum, you should contribute up to the point where your company matches what you put in," said Peter Lazaroff, financial advisor and chief investment officer at Plancorp.

In 2024, the Internal Revenue Service increased the annual 401(k) contribution limit to $23,000 with a catch-up contribution limit of $7,500 for those above 50. Meanwhile, the annual IRA limit is $7,000, with a catch-up contribution limit of $7,000.