Gen Z Workers Are Saving More for Retirement: Study

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Gen Z workers are participating in workplace retirement plans at higher rates than previous generations were at the same stage of their lives, according to a new study by the investment firm Vanguard.

In 2021, 62 percent of workers between the ages of 18 and 24 participated in their company’s 401(k) plan, up from 30 percent of people in that age group 15 years previously, the study (pdf) found. This was the highest increase of any generation.

Many Gen Z workers embrace 401(k)s due to automatic enrollment.

“Automatic enrollment and the rise of target-date funds are reshaping retirement plan behavior for all generations, but those innovations are having the greatest impact on younger workers—the millennials and Generation Z,” according to Vanguard.

In 2006, only 11 percent of employers in Vanguard’s study sample offered automatic enrollment, but by the end of 2021, that share rose to half of the plans.

The study found that the 401(k) participation rate increased from 62 percent in 2006 to 82 percent in 2021. And among plans with automatic enrollment, participation reached 94 percent in 2021, the study said.

The data for the study was drawn from a subset of Vanguard record-keeping clients, including 219 401(k) programs offered by the same employers in 2006 and 2021.

401(k)

401(k) accounts are tax-advantaged retirement plans that allow employees to forgo receiving a portion of their income, instead steering it into an account where the money can grow through investments.

Traditional 401(k)s allow eligible employees to contribute pre-tax money that is then taxed upon withdrawal in retirement, while contributions to Roth 401(k)s are taxed upfront and can be withdrawn tax-free in retirement.

Employers can contribute to an employee’s retirement savings by matching the contributions to a 401(k) account up to an amount decided by the employer.

According to a 2021 Gallup survey, the average age retirees left the workforce was 62, while non-retirees said they plan to retire at age 64.

If the goal is to retire in relative comfort, Americans say it takes about $1.1 million, according to a survey by Schroders, an asset management company.

Benefits of Starting Early

Data from the U.S. Bureau of Labor Statistics show that while 68 percent of private-sector American workers had access to employer-sponsored retirement plans in 2021, only 51 percent chose to participate.

Experts generally recommend that workers save at least between 10 percent and 15 percent of their income in a tax-advantaged retirement account. The earlier a person starts investing funds in a retirement account, the more time they have to grow and compound.

Gen Z is taking a different approach to saving money than older generations by planning to start sooner, making long-term money goals, and becoming financially independent sooner.

A recent survey (pdf) from TransAmerica Center for Retirement Studies found that workers between 18 and 25 already had $33,000 in their retirement accounts. Baby boomers had $162,000 in retirement savings, Gen X had $87,000, and millennials had $50,000, according to the survey.

A Bankrate analysis found that a worker who put away $5,000 per year for retirement in a tax-deferred account starting at age 22 would have nearly $1.3 million by the time they reached age 62, assuming an 8 percent rate of return. If they didn’t start until age 32, that balance would fall by about 50 percent to $566,000 at age 62.

Meanwhile, more than two-fifths of baby boomers are nearing retirement with no retirement savings account, according to U.S. Census Bureau data for 2020. This leaves more retirees to depend on Social Security.

However, the Social Security Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money by the middle of the next decade. When it does, the program must be funded solely by payroll taxes, which currently cover about 77 percent of benefits.