Recent research reveals that Generation Z, born between 1997 and 2012, display robust financial stability and retirement savings habits, unlike their Baby Boomer counterparts. What factors contribute to this trend?
Gen Z or Centennials adopt a more pragmatic and cautious approach to finances, which results from their experience of economic recessions and extensive exposure to financial literacy resources and tools. As such, their saving and financial planning behaviors outperform those of Baby Boomers, born between 1946 and 1964, and they are often reported as struggling with retirement savings.
This financial behavior forms an interesting backdrop to an emerging contrast between the two generations, raising the potential for consequential shifts in economic models and retirement planning strategies. The income-earning ability of Gen Z individuals further supports this. For example, a typical 25-year-old Gen Z is likely to earn more than $40,000 a year—50% more than a Baby Boomer at the same age.
Interestingly, financial stability amongst Gen Z is not equated solely with increased income. Upturns in 401(k) participation signal this.
Financial stability: Generation Z outperforms Baby Boomers
Data from Vanguard shows a notable rise in 401(k) participation across all generations in 2020, with Gen Z marking the most significant increase. From a mere 30% in 2006, participation amongst those aged 18 to 24 has doubled to 62% in 2021.
Favorable financial behaviors adopted by Gen Z largely result from automated enrollment and the use of targeted-date funds, which help to ease saving processes and investment decision-making. Consequently, millennials and Generation Z show a more proactive approach to saving early and building substantial interest over time.
Expected changes to 401(k) rules in 2025 foresee a further boost in Gen Z’s participation rates. These changes, introducing a base contribution of 3% and annual increases until reaching a cap of 10%-15%, look set to extend pension access to more employees, benefiting especially those in the early stages of their careers. This reform hopes to elevate Gen Z’s financial preparedness for retirement.
This trend towards early investment and savings could yield considerable gains, thanks to the power of compounding, promoting substantial growth over the next 40 years. Signs suggest that Generation Z, through proactive financial planning and investment, is setting a strong course for secure financial futures.
