Why Gen Zers say they’ll need one-third of what boomers do in retirement

Some clients have unrealistic expectations about retiring early while others are overly pessimistic, advisors say.

Generation Z has opportunities to save for retirement like no generation before, and indications are that they are crushing it on 401(k) participation.

The problem, though, is that they have no idea about what life in retirement will cost. Consequently, their estimates about how much they will need to amass are wildly low.

The median amount identified by workers of all ages was $500,000, according to a report published today, the 23rd Annual Transamerica Retirement Survey of Workers. While that figure itself might be on the low end for what people actually need, a startling trend is that younger workers estimate they will require much less than people who are near retirement. While baby boomers cited a median amount of $750,000 necessary to feel financially secure in retirement, that amount fell to $500,000 among Gen Xers and millennials and just $250,000 for Gen Zers, according to results of the survey.

Gen Z is new to retirement savings but so far its efforts at retirement saving are “phenomenal,” largely because access to employer-sponsored plans and state-administered IRAs or other programs is higher than ever, said Catherine Collinson, CEO and president of Transamerica Institute.

Despite that access — with Gen Zers starting to contribute to a 401(k) at a median age of 19 — they are falling through the cracks in terms of retirement savings education, Collinson said.

“Many have not yet started pursuing major life events like getting married, starting a family, buying a home and seeing how expensive life can be,” she said.

In some cases, those workers are basing their retirement estimates on their current life expenses, she said. But nearly half of people, including Gen Zers, said they simply guessed when asked how much they will need to have saved for retirement, according to the survey. Only about 20% of people either used a retirement calculator or used a worksheet to arrive at their estimates. And less than 15% said they worked with a financial advisor to arrive at a figure.

“There’s too much guesswork going on,” Collinson said. “Over the course of doing this survey for many years, it’s interesting to me that some of the estimates may actually be trending down in line with expectations of how much they think they can save versus what they really need.”

It’s also problematic that online calculators can pose a security risk, she noted. On top of that, some of the underlying assumptions used to calculate retirement savings needs are becoming outdated, due in part to the rapid rise in inflation and other factors, she said.

That’s a cue for advisors, Collinson noted.

“This is a huge call to action for those who do have formal financial plans for retirement based on the new and evolving market conditions that are impacting the assumptions that go into those models and forecasts,” she said.

According to the survey, 43% of workers have a written financial plan for retirement, including about a third of millennials and a third of boomers, Gen Xers and Gen Zers.

About 20% of workers estimate that they will need to have $2 million in assets for retirement. But the median figures for current savings are $289,000 among boomers, $82,000 for Xers, $49,000 for millennials and $29,000 for Gen Zers, according to the survey.

And while about a third of workers have financial advisors, more than half said they would prefer having an outside expert, other than their employer, monitor and manage their retirement savings plan. The survey was based on responses in November and December 2022 from more than 5,700 U.S. workers.

WHAT ADVISORS SEE

Clients are often way off base in terms of knowing how much they will need for retirement — but advisors see people overestimating as well as underestimating.

“Recently I’ve had quite a few people overestimating what they need to retire or cut back on work,” Jay Zigmont, founder of Childfree Wealth, said in an email. “If you are planning on dying with zero, then there is a point when you can have saved too much. Most of the retirement calculators and general rules assume you want to pass on money, so people overestimate what they need.”

Additionally, people are increasingly open to the idea of cutting back on work or switching jobs in “retirement,” which further reduces how much they will need to have saved, Zigmont said.

Further, the idea of actually spending down retirement assets is a difficult one for some clients, Noah Damsky, principal of Marina Wealth Advisors, said in an email.

“Clients are often too pessimistic as to when their nest egg is sufficient to retire,” he said. “This mental roadblock leads them to believe they don’t have enough, when in fact, they do, especially when taking into account other sources of income that they never had in their working years, such as Social Security.”

But for younger workers hoping to retire early, rising interest rates haven’t helped, Mike Caligiuri, CEO of Caligiuri Financial, said in an email.

“Most clients come to me soon after completing their medical training,” he said. “Most people don’t seem to have a very good understanding of how much higher mortgage rates negatively impact cash flow. Homes that used to be affordable at a 3% 30-year interest rate are now completely unaffordable at a 7% 30-year interest rate. That’s a hard pill for many people to swallow.”

Clients in their mid-40s have “typically unrealistic” expectations, Ashlee deSteiger, financial advisor at Gunder Wealth Management, said in an email.

“Couples think they can retire sooner on less funds living the same lifestyle, if not bigger, quite frequently,” deSteiger said. “Modeling this for them sooner rather than later can be invaluable if the messaging comes from an educational standpoint / one of optionality vs. shaming them, which clearly wouldn’t be productive.”