Progress, not perfection: Gen Z has made some extraordinary financial moves but still needs help

By Jessica Hall

'The problem with saving for retirement is that you don't ever know if it's good enough'

With America's retirement system increasingly a fend-for-yourself proposition, young adults have to be more aggressive about saving and investing than their predecessors were.

In some ways, Generation Z is in good shape when it comes to saving for retirement, but their overall financial health still needs some attention.

According to the Transamerica Center for Retirement Studies, Gen Z members started saving for retirement at a median age of 19. Among those who were saving for retirement, participants in 401(k) plans were contributing a median 20% of their income, Transamerica said.

"Boomers didn't start saving until about age 35. The difference is extraordinary," said Catherine Collinson, chief executive and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies.

Gen Z includes those born between 1997 and 2013. Baby boomers were born between 1946 and 1964.

"Gen Z is doing a better job saving for retirement specifically. They are more financially savvy, but they don't feel like it. There's more anxiety in younger people in general," said Anne Lester, author of the new book "Your Best Financial Life: Save Smart Now for the Future You Want."

"The problem with saving for retirement is that you don't ever know if it's good enough. There's no right answer, because you don't know how long you will live or what you will face in life," Lester said.

"One of the most important things you can do in life is taking care of your finances," she added. "There are only unknowns - you don't know what you will make, you don't know when you will die. There's an utter lack of certainty. It's unknowable, and we're bad at making peace with that."

Larry Fink, the chair and CEO of investment-management firm BlackRock (BLK), recently said the retirement crisis in the U.S. is "so big and urgent" that government and corporate leaders need to stop business as usual and tackle the problem so that future generations can grow older with dignity.

"Today in America, the retirement message that the government and companies tell their workers is effectively: 'You're on your own.' And before my generation fully disappears from positions of corporate and political leadership, we have an obligation to change that," Fink said.

Read: BlackRock's Larry Fink calls for urgent national action on retirement crisis

While Gen Z has gotten a good start on retirement savings, they haven't been as successful at setting aside money for emergencies. As a group, when they have needed money, they have turned to their retirement savings rather than to options such as emergency funds, savings or credit cards.

"The kicker is that a high percentage of Gen Z workers have taken a loan or hardship withdrawal [from their retirement accounts]- 27% have taken a loan and 34% have taken a hardship withdrawal. That's counterproductive," Transamerica's Collinson said.

"When we look at the reasons for loans and hardship withdrawals, it's a lack of emergency savings. Gen Z is better at saving for retirement than for emergencies," she said.

Collinson said among the reasons cited for taking loans, 6% of Gen Z respondents identified burial or funeral expenses and 16% said they needed money to support their parents.

"We can't underestimate how many younger people may have been called upon to help family during the pandemic," Collinson said.

After contributing enough to a 401(k) to get matching funds from their employer, if those are available, Gen Z members need to concentrate on building up their emergency funds, said Michael Finke, a professor of wealth management at the American College of Financial Services.

Finke said having six months' worth of expenses set aside for emergencies is a good benchmark for most people, although the actual amount of savings needed depends on a variety of factors, such as a person's job security and their overall expenses.

Automating savings is the easiest way to accumulate an emergency fund, Finke said, by getting that money out of sight and out of mind.

Do more than a 401(k) match

According to 2023 research from the CFA Institute and the Finra Foundation, 82% of Gen Z investors surveyed in the U.S. said they began investing before they turned 21. That's compared with 31% of millennials and 14% of Generation X members who said they began at that age, according to a 2018 survey by the same organizations.

Millennials were born between 1981 and 1996, while Generation X includes those born between 1965 and 1980.

Half of Gen Z investors were driven to invest by FOMO - the fear of missing out - according to the CFA Institute and Finra Foundation. And a total of 48% of Gen Z members said they used social media as an information source - more than the 45% who relied on parents and other family members for investing information, the groups said.

"For better or worse, social media is the world we live in today. It's an opportunity to learn from those they relate to," Collinson said, adding: "It's important to vet your sources and do your homework. Be on the lookout for bad actors who just want access to your money."

Lester said there are barriers to entry in the investing world that could be streamlined.

"You don't have to know a lot to save for the future successfully. But unfortunately, the barriers to entry are high everywhere but with a 401(k) account," she said.

Lester said being worried about perfection is something that can trip up young people.

"There's a saying: 'It's not about perfection. It's about progress.' And that's so true. Nothing you do is irrevocable. You can always change it," Lester said. "The two wrong answers are not saving at all and not investing in your future."

Finke recommended that people automate their investments and refrain from the urge to be an active trader.

"The more active you are, the more you tend to lag the market. You're not a genius trader. Don't waste your time trying to beat the people who are," Finke said.

And when people invest in themselves - whether through education or professional development - it can generate even better returns in the end than traditional stock investments, he said.

"The payoff down the line may be more profound," Finke said.

Start early with financial education

There are now 35 U.S. states with current or pending rules that would make personal-finance coursework part of high school graduation requirements, according to a report by the Council for Economic Education.

"Financial literacy in our society needs improvement. In our culture and our society, delayed gratification is increasingly difficult. But the more you delay gratification, the better off you'll be financially," said Daniel Razvi, senior partner and chief operating officer at Higher Ground Financial Group, a Maryland financial-planning company.

"Schools can only do so much. It starts at home. Parents must nurture those skills," Razvi said, adding: "Parents need to be financially literate themselves."

The content of high school personal-finance classes, and how that content is delivered, must be compelling, relevant and meaningful, Lester said. "I hope it helps. We've seen so many people desperately trying to improve financial literacy. I don't know what the silver bullet is."

What about starting even younger and weaving financial education into everything from grade-school math to home economics, history and political science?

"Teaching financial literacy in schools is imperative to help people with their futures. It's a fundamental part of education," Collinson said. "It's encouraging that so many states are requiring financial education. But it could even be started in elementary schools."

Collinson noted that children can also use guidance around the allowance they may get from their parents. "And we need to think about those families without those resources or opportunities so they can still learn about money," she said.

Although younger adults face obstacles such as inflation, a challenging housing market and limited help with retirement savings, Collinson said she has confidence in Gen Z's future.

"I have great faith that Gen Z will change the world for the better. Their efforts with retirement savings bode well for them. Their work ethic - the extent to which they're working multiple jobs and side hustles - is commendable," she said. "They are seen as lazy, and they're anything but."

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of "Financial Fitness" articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.

-Jessica Hall

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