According to a new report, Gen Z is taking saving for retirement seriously. Vanguard found that, in 2021, about 62% of Gen Zers are contributing to a 401(k), which is more than twice as many as similarly-aged workers in 2006.
Traditional 401(k) accounts have tax advantages. Workers contribute pre-tax money that is taxed upon withdrawal. On the other hand, Roth 401(k)s work a little differently, with the money being taxed before contribution and withdrawn tax-free in retirement.
So, why are Gen Zers embracing saving for retirement? It largely comes down to automatic enrollment. Many employers automatically enroll employees into a 401(k) plan as part of their onboarding process. This process is much more common today than it used to be. According to Vanguard, in 2006, just 11% of 401(k) plans had automatic enrollment. By 2021, half of all plans did.
This change significantly affected how many workers participate in retirement plans, and not just for Gen Zers. From 2006 to 2021, the 401(k) participation rate for all employees jumped from 62% to 82%. For those with automatic enrollment, participation soared to 94%.
But that’s not all. In addition to more people saving, people are saving more. Vanguard also found that the average contribution rate from 2006 to 2021 rose from 7.2% to 7.7%. For Gen Zers, contributions rose from 4/8% to 5.4%.
Maximizing retirement savings will have the biggest impact on younger workers, but the more widespread use of automatic contributions will continue to improve the number of plan participants and improve allocations and retirement savings for generations to come.
One thing to keep in mind is that the information collected by Vanguard only looks at its own 401(k) plans. Employers use different plan providers and other types of retirement accounts, but no matter what kind of plan you use, the important thing is to get into the habit of saving early.
Any opinions are those of Thomas Fleishel and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.