It has long been a rule of thumb to have $1 million saved for a comfortable retirement; but, thanks to inflation, the youngest generation of workers likely will need three times as much. According to a recent analysis conducted by Wealthcare Financial, by the time Gen Z and millennials retire, they will need around $120,000 to $150,000 per year to live comfortably — making $3 million the average amount they need to retire.
Here’s a look at the role inflation is playing in retirement saving needs, whether or not this generation is on track to reach their savings goals, and what this generation can do to catch up if they’re currently behind.
Inflation Is Making It More Expensive to Retire
The cost of living has risen sharply over the past couple of years, with home and rent prices — as well as the costs of groceries, gas and other daily essentials — skyrocketing. Things will be even more expensive by the time younger generations retire. That’s why Wealthcare Financial experts believe Gen Z and millennials should aim to save $3 million for retirement.
“Inflation plays a big role when we are planning for retirement, especially for the younger generations, because the price of necessities will go up over the course of their lifetime,” said Shaun Tarzy, managing partner at Wealthcare Financial.
However, Tarzy notes that not everyone will need $3 million to retire. That figure assumes that you will need $150,000 per year for a 20-year retirement.
“Three million dollars is the upper end of the range that will be needed, depending on current income,” he said, “so Gen Z and millennials should use this as a goal, but not necessarily the amount they absolutely have to save to retire.”
Are Gen Z and Millennials Saving Enough for Retirement?
The Wealthcare Financial study found that across age groups, clients contribute an average of $500 to their retirement per month. But is this enough?
“Unfortunately, that isn’t enough for anyone making over $40,000 a year,” said Michael Boggiano, managing partner at Wealthcare Financial. “Typically, the rule of thumb is to be contributing 15% to 20% of your gross income. If you’re able to contribute more, you absolutely should.”
What To Do If You’re Falling Behind on Your Retirement Savings Goals
According to the Wealthcare Financial report, Gen Z and millennials should have $500,000 in retirement savings by age 25, $1 million by age 40, $2 million by age 50 and $3 million by age 60. If you’re currently off pace, there are some steps you can take to catch up.
“Gen Z and millennials should start by taking advantage of any employer 401(k) match offered to them, while contributing at least 3% of their income as well,” Tarzy said. “Those without an employer match should be taking advantage of any future retirement tax breaks by maxing out a Roth IRA every year and investing additional cash where they can.”
Investing wisely also can help these generations reach their lofty retirement savings goals.
“They should be taking these contributions and investing them aggressively,” Tarzy said. “A good place to start is in an index fund, like the S&P 500, which has historically delivered a return rate of about 10.5%.”
To keep up with inflation, Tarzy recommends increasing your retirement contributions whenever possible.
“We recommend putting your raises into your retirement account,” he said. “Dropping an extra $1,000 or more a year into your 401(k) can dramatically improve your savings over time thanks to compounding interest.”
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